Every foreign exchange trader has their own philosophy when it comes to what they look at & how they look at it when they trade. One of the most common elements I find traders look at is US equities. There is the thought of a relationship between US equities & the US Dollar when they place trades or market analysis. The days when US equities up go, the US Dollar & Japanese Yen are sold, to take on more risk. The US Dollar & Japanese Yen are bought when US equities decline, as a flight to safety. Of course, anyone who studies intermarket analysis knows correlations are not always in place, and when they are in place, it does not last forever.
This past week was a good week for the US equities, until Friday when the SEC/Goldman Sachs news caused havoc with equities. There was a slight pullback Tuesday, as an opportunity to buy equities, then a nice run up the next two days. Trading the FX market, on the other hand, was extremely rough & probably would have been beneficial to stay away during the week (I can say first hand, as a FX trader).
Due to the market action the past week, thought it would be worth taking a look to see if there was any correlation between US equities & the EURUSD pair, only as a sample. When you get right down to it, the correlation was off & on to the point trades would have been better off not looking at it this week, so we will break it down day-by-day.
- Monday: The primary direction is correlating, but defiantly not a tick-by-tick basis. For a day trader, it would have made things very though, especially in the afternoon where there was some money-making opportunities in FX while US equities were consolidating. There was also a mini-double top in EURUSD, which US equities did not have it.
- Tuesday: The correlation was as close to perfect as you can get. There was volatility on both sides, but it was still pretty choppy all around. Made it tough to get in a position & hold on to it. Defiantly, today was the best day this week for correlations.
- Wednesday: Only mid-day was there any correlation. In the morning, EURUSD rose while US equities was in a sideways direction. At night, the EURUSD was on a sideways direction while equities were going up.
- Thursday: The correlation was there for most of the day & would have been an all around good indicator. There was a little disconnect at night, but was intact most of the day.
- Friday: One thing to keep in mind is regardless price action in equities in the afternoon, the FX market liquidity & volatility always slows down around 12 noon est. It is also normal to see retracement, if there were big moves during the week as traders book profits. There was a correlation in the early morning. Note the decline in US equities when the SEC/Goldman Sachs news was released. There was a huge plunge in US equities, but it was not as extreme in EURUSD. There was a decline, but not as big.
Regardless if US equities/US Dollar correlation was used this past week, FX traders had a rough week. If correlations were used, it would have made the week worse.
Question for readers… do you look at this correlation before placing a trade or doing market analysis? Love to hear from both FX & US equity traders. Please post your answers in the comment section below. I look forward to your answers