While I have written quite about forex correlations in recent posts, the focus has primarily been on correlations that exist between currencies. In this post, I would like to address a correlation that exists between currencies and other forex markets- specifically the relationship between the Euro and US stocks. If you look at the chart above, you can see that an unmistakable correlation exists between the S&P500 and the EUR/USD that stretches back at least six months. Generally speaking, when the EURUSD has risen, so has the S&P 500, and vice versa. In fact, this correlation is so airtight that one analyst recently discovered that the two financial vehicles often reach intra-day highs and lows within minutes of one another! Why is this the … [Read More...]
Euro Nears Breaking Point
It’s deja vu all over again in the forex markets as another twist in the sovereign debt crisis has sent the euro tumbling by the greatest margin in nearly a year. It was only last month that I posted “The Euro (Still) has a Greek Problem,” and yet, forex markets are once again reacting to the possibility of a Greek default as thought it were a new development. At the very least, investors finally seem to be acknowledging the inevitable. There have been several factors at work in this latest episode. On Monday, S&P downgraded its credit rating for Greece to CCC, following on a similar move by Moody’s. That means that Greece’s sovereign credit rating is now the lowest in … [Read More...]
Forex Volatility Continues Rising. What are the Implications for the Euro?
This week witnessed another flareup in the eurozone sovereign debt crisis. As a result, volatility in the EUR/USD pair surged, by some measures to a record high. Even though the Euro rallied yesterday and today, this suggests that investors remain nervous, and that going forward, the euro could embark on a steep decline. There are a couple of forex volatility indexes. The JP Morgan G7 Volatility Index is based on the implied volatility in 3-month currency options and is one of the broadest measures of forex volatility. As you can see from the chart above, the index is closing in on year-to-date high (excluding the spike in March caused by the Japanese tsunami), and is generally entrenched in an upward trend. Barring day-to-… [Read More...]
Fading stimulus hopes lift the US dollar
The US dollar rallied quite impressively overnight, boosted by fading hopes of a US fiscal stimulus agreement with both sides remaining seemingly deadlocked. The US dollar index rose 0.53% to 93.53 with the index tracing out triple-bottom support at 93.00 now. That saw the EUR/USD ease by 0.55% to 1.1740 with a failure of 1.1700 now signalling further losses. Brexit concerns compounded the negative sentiment for sterling, GBP/USD falling 1.0% to 1.2930, with the 100-day moving average (DMA) at 1.2825 being the next important support. USD/JPY continues to trade quietly between 105.00 and 106.00 with Japanese fund managers in wait and see mode like the rest of Asia. Some AUD/NZD selling was evident overnight as New Zealand’s Labour party heads for a landslide victory in this weekend’s election, … [Read More...]