I am thinking about cross market correlations. How much correlation is there with the stock markets and the currencies?
CHF and JPY typically lose value when the stock markets increase. We know this as risk flows. However, it is not a perfect correlation, if it was the JPY was be at all time lows since the stock markets are at all time highs. What is the amount of correlation? When does this break down? It is possible to calculate this number?
CAD, AUD & NZD are the reverse, they typically increase in value when the stock market falls. It is also not a perfect correlation. If it was these currencies would be at all time highs since the stock markets are at all time highs. What is the amount of correlation? When does this break down? It is possible to calculate this number?
Anyone point me to some information on this topic? I know they are correlated but I wish to know more than just that.
True, the correlations are not perfect, meaning these are not mathematical relationships. Rather they are based on the big banks’s assessment of future risk and potential profit. Risk is hard to quantify mathematically because each investment is for unknown specific reasons and has its own anticipated time duration.
Rather than focusing on the mathematical ratio between the numbers involved, look at the direction of travel of the price of each to see correlation.
AUD normally has a positive correlation with US stocks. When the Dow rises, AUD/USD is usually also rising. When the Dow falls, AUD/USD is also usually falling. Not at the same speed and not at exactly the same time. NZD is a subsidiary of AUD and normally does what AUD does.
CHF and JPY have a negative correlation with US stocks. These are safe haven currencies which investors buy if they expect lower returns from holding stocks.
CAD is sensitive to the crude oil price as oil production is such a large component of Canada’s economy.
A basic rule that will help is - market risk on, Dow goes up, buy AUD, NZD: market risk off, Dow goes down, buy CHF, JPY.
Don’t take it literally. But use it s as a filter - e.g. if the Dow is falling hard and you’re thinking of buying AUD, ask yourself some tough questions why.
I’m aware of risk flows, I mentioned this in the first post. What I am looking for is more than that.
See last week selling risk on currencies was a good idea. This is due to the risk off environment. If you look at the AUD currently you will see many of those pairs are in a downtrend on the W D and H4 time frames. The current pullback in the AUD has made several good sized retracements from the previous swing and is lining up with resistance and falling trend lines. This could be a good time to sell AUD. However the stock market is rallying at all time highs. Should the stock market fall so will the AUD, back in the direction of its general trend. However if the stock market is to rally more the AUD will break out of the falling trendlines and break above previous swing highs, indicating that the downtrend in the short term might be over…
Therefore if I sell the AUD I need to really know what the stock market plans on doing. As the AUD will probably end up doing what the stock market does in the short term.
I guess AUD is being pulled about a bit right now due to uncertainties over the coronavirus outbreak in China. It could be all over the place in the next week purely based on rumour, mortality rates, infection totals and excitable tweets. I wouldn’t put much faith in AUD or NZD TA right now but it could print some dramatic moves - if you’re willing to catch a tiger by the tail.
As for the Dow, it will probably just keep going up unless its seriously de-railed by bad news events.
Well that’s the thing, the AUD is always being pushed and pulled by the stock market. I was hoping to find some way of discovering just how much correlation is has with the stock market. I know that currency correlations can be calculated but I’m not sure if this applies across markets as well. One thing I’m looking into is creating an AUD / SPY chart in MT5 since it allows you to make custom charts.
As for stock in general today, looks like it has been a sideways day, however the AUD has still fallen. Could be due to upcoming thoughts about the governor speaking in several hours. Stocks could also be sideways ahead of the NFP tomorrow which will most likely have an impact on the stock market.This might end up being a classic case of buying the rumor and selling the news. However with REPO’s occurring it could just be manipulation……
I wish the currencies had less correlation with stocks. They claim that Forex is the least manipulated market due to the size however it is still impacted by the stock market, which we all know has much manipulation.