While AUD broke above the trend line, the RSI divergence shown earlier in the 240 minute chart remain valid for the next week as well.
It has reached 100% of Fib. extension and risk remains for a sharp correction.
The AUDUSD appears to be strongly correlated with the DJX and the SPX. Questions: (1) Is there a reason for this, has this always been the case? and (2) What does this tell us about the US stock market price moves? Does it mean that the up and downs as well as the general trends in the SPX are largely explained by the relative strength/weakness of the USD to other currencies? If the USD is weak stocks go up, if it is strong they go down? Such an inverse relation is apparent when comparing SPX to the Dollar Index, though it is not perfect. So what's so special about AUDUSD?
The reason AUD is so strongly correlated with SPX is the HFTs & ALGOs that run the buy program. They borrow USD / JPY because the interest to borrow is virtually zero. Then they buy high yielding currencies like AUD which pays more interest. It is called carry trade. That carry trade is then invested in risk assets like equities, gold etc to push the prices up. When dollar gets costly, it takes fewer dollar to own an asset. So the value of the asset goes down. Inversely, when dollar loses value, the asset becomes costlier as now it takes more dollar to own that asset. That is why the inverse relationship. But that is not always guaranteed. There have been times, when both dollar and equities have gone up together, although very rare.
Thank you very much! Your explanation with the carry trades makes a lot of sense and I'll have to learn more about it - is there some useful link about this topic you could provide?.
Since I have no experience at all with FOREX may I ask you for a clarification of your sentence: "...they buy high yielding currencies like AUD which pays more interest." What type of interest is this? Thanks again!
The AUDUSD appears to be strongly correlated with the DJX and the SPX. Questions:
ReplyDelete(1) Is there a reason for this, has this always been the case? and
(2) What does this tell us about the US stock market price moves? Does it mean that the up and downs as well as the general trends in the SPX are largely explained by the relative strength/weakness of the USD to other currencies? If the USD is weak stocks go up, if it is strong they go down? Such an inverse relation is apparent when comparing SPX to the Dollar Index, though it is not perfect. So what's so special about AUDUSD?
Thanks!
The reason AUD is so strongly correlated with SPX is the HFTs & ALGOs that run the buy program. They borrow USD / JPY because the interest to borrow is virtually zero. Then they buy high yielding currencies like AUD which pays more interest. It is called carry trade. That carry trade is then invested in risk assets like equities, gold etc to push the prices up.
ReplyDeleteWhen dollar gets costly, it takes fewer dollar to own an asset. So the value of the asset goes down. Inversely, when dollar loses value, the asset becomes costlier as now it takes more dollar to own that asset. That is why the inverse relationship. But that is not always guaranteed. There have been times, when both dollar and equities have gone up together, although very rare.
Thank you very much! Your explanation with the carry trades makes a lot of sense and I'll have to learn more about it - is there some useful link about this topic you could provide?.
ReplyDeleteSince I have no experience at all with FOREX may I ask you for a clarification of your sentence: "...they buy high yielding currencies like AUD which pays more interest." What type of interest is this? Thanks again!