An hypothesis about European stock performance
Looks as though an error in the EUR/USD ‘fair value’ model has a significant relationship with DAX
The appreciation of EUR in excess of what the rate structure would predict can be understood as gauge of market expectations of eventual ECB tightening. I observe that the error in the “fair value” model relating EUR/USD to the rate structure appears to have a significant relationship with DAX.
EUR is rich to the rate structure.
The chart below separates the euro into two components: One predicted by the rates structure, and the model’s error.
I observe that changes in the error component have far greater impact on daily moves in DAX than changes in the predicted component:
The “error” component of the Euro is highly significant, the “predicted” component not so much.