When This Correlation Breaks Down, It Means Opportunity For Traders
Editor’s Note: I am
pleased to welcome Yra Harris to TradingMarkets. —
Brice.
In
this column, I will try to convey to users of currency markets a trader’s
perspective
on long-term trends as well as explaining events that cause inter- and intraday
volatility. Monday’s movement was a classic example, as the news of Saddam
Hussein’s capture was a major news story that happened over a weekend.
Along with the news from Iraq was the not unsuspected news from the European
Union that the first attempt to reconcile the new constitution ended in failure.
Both of these can be considered dollar-bullish on their face but even more so,
considering that the market has been long foreign currencies and short dollars
for an extended period of time.
Sunday night, the markets opened in Asia with stop losses getting
hit and the dollar being well bid. To augment dollar strength, the stock indices
were bid aggressively higher and the precious metals sold off hard. All was
in sync — however by the end of Monday’s trading session, all things
returned to trend — the dollar actually closed lower than Friday, the
metals had rallied to unchanged and the equity indices sold off hard and closed
lower on the day.
This was classic trend action — sloughing off a news event
and reasserting the trend. The dollar is weak and as it showed today it will
trend weaker until the underlying fundamentals shift. The global market is convinced
that the U.S. policy makers desire a lower dollar (they don’t openly state
this) but follow the arrows — the futures charts of the currencies point
higher. The U.S. is maintaining real negative rates of interest on the short
end of the yield curve, which is forcing investors to seek positive returns on
their capital elsewhere. The flows of money have been to high-yielding currencies
all year as the best performers have been Canada and Australia. The euro has
done well because it pays a higher rate of interest than the U.S. as well as
being a proxy as the largest reserve currency after the dollar.
I will return to the theme of interest rates and currency values
repeatedly, because when this correlation breaks down, it creates the best opportunities
for traders. The question that you will learn to ask yourself daily was taught
to me long ago: “What is wrong with this picture?†It is a trader’s
major question when a market response counters the fundamental analysis. An
example would be a rising stock that gets blowout news and winds up doing a
reversal (new highs and closing lower). Always pay attention to that picture,
for there are trading opportunities lurking. Monday was that type of day for
U.S. equities — but not the currencies.
I must also tell you that with the holiday season upon us, the
currency markets thin out and become treacherous. There will be a great deal
of push-pull as the jobbers try to attack the downside while the strong hand
trend traders try to push the trend as they enhance their year-end performance.
No time for heroes to appear in this battle — don’t look for long-term
positions, but rather take the opportunity to hit and run as each side pushes
the market too far.
Good luck, and you will hear more from me later in the week.
yra53@aol.com