The Art of Currency Trading by Brent Donnelly

Author:Brent Donnelly
Language: eng
Format: epub
ISBN: 9781119583578
Publisher: Wiley
Published: 2019-06-12T00:00:00+00:00

Figure 8.6 Daily NASDAQ vs. AUDUSD (gray line), January 1996 to December 1999.

Now take a look at Figure 8.7, AUDUSD vs. the NASDAQ during the heat of the RORO period from 2007 to 2010.

Figure 8.7 Daily NASDAQ vs. AUDUSD (gray line), February 2007 to June 2010.

It is crucial to know what regime you are in when analyzing potential correlations between equities and currencies. There is usually some correlation between equity and currency markets but these relationships are unstable and thus you must always be on the lookout for changes in direction and magnitude of correlation.

One of the most reliable equity index‐versus‐FX correlations in my career has been the Nikkei versus USDJPY. This is because Japanese citizens hold the largest pool of savings in the world. When things look good, they buy foreign assets and sell JPY, seeking higher returns. When things look bad, they repatriate money (bring it home), which triggers yen buying (lower USDJPY).

Next, Figure 8.8 is a daily chart of USDJPY versus Nikkei futures. You can see that this correlation was strong throughout almost all of the 10‐year period.

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