What to make of the surprising move in the euro?
Europe's common currency was this close to breaking above $1.40 on Thursday, trading at $1.3992 (before getting slammed and closing the day at $1.3840). That's a level not seen since October 2011.
So how high can it go, and what's driving the price action?
The euro will continue to strengthen against the dollar so long as the European Central Bank doesn't pump euros into the financial system the way the Federal Reserve did with the dollar, according to Steve Cortes, founder of Veracruz TJM. He notes that the ECB still won't partake in quantitative easing, the policy the Fed adopted several years ago where it added a couple of trillion dollars into the financial system.
"It's not that Europe's doing better than the U.S. economically because it isn't," said Cortes of the euro's strength. "It's the fact that the European Central Bank is not as accommodative as the Fed."
Why does this matter for the U.S. investor?
Because the U.S. stock market is made up of multinationals with global sales, a weaker dollar tends to be good for exports and is supportive of higher equity prices. "If you overlay the S&P , particularly the cyclicals with the euro currency, those stocks have done well as the euro currency has risen," said Cortes. "A cheaper dollar means it's easier for those multinational cyclical companies to sell their goods to the rest of the world," he added.
Cortes believes that the dollar will ultimately strengthen against the euro and that could take its toll on cyclical stocks like Caterpillar, General Electric and oil companies. "Those names have tended to trend inversely to the dollar," he said. "They rallied while the euro currency rallied. If the euro currency is turning around—and I think it is—that's a problem for those cyclical stocks."
However, Ari Wald, head of technical analysis at Oppenheimer & Co., thinks the euro will fall a little bit but head higher than current levels afterward.
"Bears pushed [the euro] lower and I think bears are taking control of the recent trading action," said Wald. "So, from a trading signal, it is one to sell."
He thinks that the euro will hit support starting at $1.38 and especially at $1.37. "I think that's a pretty solid level of support," Wald said. "I'd be looking to buy it there but, near term, I think it goes lower."
With the euro's 200-day moving average rising, Wald has a particular target in mind. "I'm looking for the euro to get back to some of its 2011 level around $1.45," he said. "Just in the near term, the bulls look a bit tired and I think you can be tactical and get in at a better level."
To see the full discussion on the euro, with Wald on the technicals and Cortes on the fundamentals, watch the video above.