DAX buy recommendation intact despite pullback

Price at time of writing – 8383

Despite last week's 3.125% pullback, my recent buy recommendation (triggered on the break above 8075) remains intact, and there is no reason to change the target price of 8972.

Although new headwinds have been created by Japan's ongoing devaluation, Germany can hardly complain about their exchange-rate luck post global financial crisis. Some Germans may complain about the taxpayer cost of bailing out southern Europe, but they must surely realise that the weak euro resulting from the eurozone struggle has kept their employment and factory orders up. A Germany with a deutche-mark would today be burdened with a currency so strong (think Swiss franc) that a deep recession would have been inevitable. Nonetheless, Japan is the closest competitor to Germany in the manufacture of luxury goods, and therefore we must keep an eye on the EUR/JPY cross-rate.

My guess is that the Japanese government and Bank of Japan have a ‘behind closed door’ USD/JPY target band in mind, most likely between Y115 and Y125 (currently the rate is around Y101). This would place the yen at around the centre-of-gravity of its 12-year trading range between 1996 and 2008, and on completion would have devaluated the yen (against the US dollar) by around 50% from the start of the move last September. This would clearly have implications for Germany's terms of trade.

Meanwhile, we must be guided by what the chart is telling us. The current DAX trading range has parameters defined as 8075-8972.

The DAX chart

 

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