Thursday

Currency vs Market Correlation

Post a Comment December 17, 2009 – 2:44 pm |   | Permalink |  Print This Post |

When markets were rising in the last six months, the USD was on a death spiral. Eventually everyone saw the correlation and concluded that markets were driven higher by a weaker USD and that the USD holds the KEY to where markets would go next. If the USD continues lower, then expect markets to go higher. So the bears were sitting on the sidelines waiting for a USD reversal before shorting. Now that the USD has strengthened, the AUD/USD fell from 0.93 to 0.88 (we got out of our long AUD at ~0.91 as we thought there were too many bears in the USD camp) - markets continue higher (or at least not significantly lower). Everyone is puzzled by the lack of correlation in USD:Dow.

If there is one thing we know, it is the relativity between markets, currencies, commodities, etc. Correlation is as fickle and volatile as the markets. It is NEVER straight forward and correlations break down and reverse. And even if its still positively correlated, the “transient” loss of correlation may take time. Enough time for investors to lose hope and throw in the towel.

We are not trading the Eur/USD. We have our fingers in too many pies.

Our last few days (and probably the next few months) will be spent on researching agriculture. We are very bullish on soft commodities - it has not had its day for decades, food inventories are down, bad weather, lack of farmers and credit for farmers are all good fundamental reasons that will be used as fuel for this bubble. The manipulators thrive on bubbles. And once a bubble bursts, they move on to the next. Everything has gone up 50-60% - except for agriculture. Our recent focus have been on lean hogs - all pig farmers are making huge losses due to swine. Exports were down, resulting in governments providing subsidies to farmers to have their pigs culled. BUT the Chinese love their pork, and soon swine will be forgotten in favour of roast porks and pork buns and pork dumplings. We will be posting a series of articles on individual soft commodities over the next few months : lean hogs, soy, cotton, orange juice (price of OJ was extremely low few months ago despite higher demand and low production based on the CRB Commodity Yearbook 2009).

chinese-roast-pork

For the night, we are sitting back hoping for markets to throw in the towel - but holding back on our shorts until 11300 is reached (not saying that it would but that’s our road map). Whatever the high turns out to be, it will not be reached for a while after markets turn. The higher it goes, the more unlikely we will see it again in the near future. As we posted a few nights ago, once all the big banks complete their capital raisings, then markets will be ready to fall.