I’m compelled. I need to share this with you as it’s been on my mind for some time, and in this instance – It “could” serve as extremely valuable.
Understanding “correlations” (and getting a grasp on intermarket analysis) is an integral part of success in foreign exchange trading, as in any trading for that matter. All the working parts of our global economy do indeed fit together as one, and here the age old saying that “knowledge is power” has never carried such weight.
Long term intermarket analysis ( such as with the relationship of bonds, commodities and the dollar ) doesn’t provide short term trade signals. The big picture analysis still sees “nestled within it” the usual day to day stuff, and on occasion a change in the “big picture stuff” overlaps with a change in the near term / news driven / psychotic mahem stuff…and POW! You’ve got a problem. One of those times where you consider “son of a bitch – I never saw that one coming”.
Well…if we look at the general trends / correlations as of late – what have we got?
I’ve been considering a “pop” in USD and as well U.S equities as the two have generally traded hand in hand – BUT….the “accepted” correlation has had the two trading opposite no?
Gold has traded down for weeks on end – yet so has the dollar. Don’t these two as well – generally trade opposite one another? Short of blatant manipulation ( of the paper markets without question ) how can the price of Gold go down….as well as the value of the currency it’s priced in? – It’s impossible.
The point?….ahh yes the point. Well…I can’t give it all away in a single post but…….I’d encourage you to keep your eyes peeled for one or two of these to give you a nice quick “kick in the face” anytime soon as they’ve likely been out of kilter longer than you’ve been following them anyway. Not to mention…we’d better throw the Yen in there for good measure.
If it where easy – everybody would be doing it right?
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Great point about the Dollar and gold
Hi Kong, I got dollar/gold part, other than that what is your point? Sorry, what is happing? Thanks.
JP…..I wish I could just lay it out for you – unfortunately it’s just not that easy.
It requires alot of time and effort…and one needs to stay diligent / aware.
When these macro correlations change – accounts get liquidated….and that “is” the general plan right? – to liquidate your account?
I suggest taking the sidelines – and look for opportunities “post risk”.
Thanks Kong. Do you have any target dollar wise ? Sitting sidelines and missing rally is frustrating,,, feeling loser.
You need to be planning the ” the next trade” – not chasing.
From a psychological perspective – If you feel you are missing out on something then unfortunately……you already have.
from the correlation dollar down = gold up right?
As old as time we’d imagine the correllation of gold up = usd down……but such has not been the case since the incredible effort by the Fed – to devalue the U.S dollar.
They couldn’t just let the dollar die ( and in turn see the price of gold skyrocket ) in such an obvious fashion – hence the massive campaign (via the Fed’s larger trade partners/ big banks) to short the precious metals “paper market” along side this devaluation.
Gold goes down….USD goes down too….no one notices right? WRONG.
You’ll see it in the headlines soon enough – as Comex defaults ( delivery issues mount) – and one domino falls…. so do the rest.
Meanwhile China and other physical buyers crank up the buying!
Brilliant Ben! Brilliant!
Where does China buy gold once the Comex disintegrates?
The thing I think about correlations is… (Assuming market cap and such is the same) A correlation of 1 kind of means for every dollar in A, a dollar goes in B,
Negative 1 means for every dollar coming out of A that dollar goes into B…
(Of course if its currency it could be every Euro or whatever)
So if one thing is happening you might be able to predict where it goes. Except divergences of correlations happen all the time and they change but partly because there are simultaneous other correlations between the same things causing different shifts of capital proportional to those other assets.
Also, if capital starts pushing up euros, you have to think of what that means globally. Americans think of European companies balance sheets in dollars so if they give you a company that has £1B on their balance sheet Americans will convert it in their head to dollars… So if euros becomes stronger against dollars that balance sheet will look stronger to an American. On the opposite perspective, Americans also could very well be motivated to buy stocks in general if the dollar is dropping.
For example when they devalued the yen, the Nikkei rallied on domestic buying…
But after 30% devaluation in the dollar as the Nikkei doubled, global investors thought “wait a minute, we have to sell twice as expensive shares in companies? after the balance sheets devalued 30%?” and that drove much greater volatility since it was a global selloff. That in turn drove Japanese to sell and raise cash, which increased cash position and as a result drove the yen up much to the chagrin of Abe. But the currency rising and market rising can result in some “bubbles” as well like the Nikkei or dot com bubble…
Okay I am done for now, what do you think?
After gold topped in the 80’s it went down plenty as the market and dollar climbed.
Correlations break all the time. Gold is down because qe doesn’t cause inflation and the euro is here to stay, for now!
“POW” is coming in 2 years,,,, not now as long as we have QE ??
Market sells EM, and buys EUR/AUD to hedge. Plus, more euros holding EM vs USD that has been giving more power to the Euro in the unwinding of that trade. Gold fades during Monsoon weather normally too. We have a false sense of calm even with the huge sell off in EM because Eur/USD has held the German Yield down and our yield somewhat down. But, still amazed how weak dollar is.
Who is in the no-taper, camp? I had a long usdjpy position and just closed it feeling like taper just isn’t the right option.
Gold correlates well with the 10-year. As long as real interest rates are zero or lower, it fares well. As soon as real rates poke above the 1% level, gold doesn’t look so good.