It’s pretty clear that if the FX /equity market correlation was even slightly behaving then euro yen would be trading sub 110.00 and cable around 1.3500.
It’s pretty clear that if the FX /equity market correlation was even slightly behaving then euro yen would be trading sub 110.00 and cable around 1.3500. Whilst on a pure price basis equities have been a sell, the reverse has been true of dollar yen with both positions causing sentiment to be cautious as the market stretches the inverse correlation. It could be argued that sterling’s resilence in the face of equity market weakness represents accumulation with the reverse true of the yen. Hence an extended rally in sterling may be at hand.
This view is probably best expressed through sterling yen as, until cable breaks free from the 1.4000/ 1.5000 straight jacket, participants seem content to occupy the sidelines. Gold continues to correct from its excursion above $1000. The long term outlook is bullish, but short term the rally looks spent. Once again this would normally imply dollar strength, but with inverse correlations at play, the easing of safe haven demand could put pressure on the dollar.
Given the current state of flux, the sidelines doesn’t look a bad place to be at the moment. As discussed, there are some interesting trades around, but for now they are the exception rather than the rule.