Monday 24 November 2008

ForexGen Currency News…


Currency trading markets continue very highly correlated to broader risky asset classes, as the common theme of financial market deleveraging creates strong links between sometimes unrelated market prices. One of the clearest examples is the high correlation between the Japanese Yen and the US Dow Jones Industrials Average—at its strongest in at least 20 years. Highly risk-averse markets tend to buy the Yen and sell equities at the same time. As such, it remains important to watch the Dow and other indices—especially as the Dow Jones trades near important 10-year support.

Other noteworthy relationships include the increasingly tight correlation between the G10 Forex Carry Trade and the Reuters/Jefferies CRB Commodities Index. Given that financial deleveraging can affect all types of highly-leveraged markets, we see that many commodities have sold off and rallied at the same time as the FX Carry trade. The G10 Forex Carry Trade currently consists of going long the New Zealand Dollar, Norwegian Krone, and Danish Krone while going short the US Dollar, Swiss Franc, and Japanese Yen. A continuation of ongoing themes of financial market stress will likely keep these relationships intact through the foreseeable future.

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