Forex Pair Correlations

For the past few months the AUD/JPY has been key in tracking how capital would flow in or out of index futures such as the ES or the NQ. Whenever the spoos were either lagging or leading a snap back to the ‘AUD/JPY mean’ was almost assured – which made for a great reversion play. Recently however the game has changed – why I frankly do not know. As I am not a fundamental trader the nitty-gritty details of how carry traders play their nasty games largely elude me. I’m a simple market megalomaniac and the only thing that matters to me is that the correlation is slowly eroding:

Plus those swings on my stochastic are erratic and hard to follow – time to put this one to rest. Fortunately I have not been completely useless and found a much better match – and again it’s an FX currency pair which tracks the ES futures almost perfectly:

Now, isn’t that a lot more like it? The AUD/HKD (Aussie Dollar vs. Hong Kong Dollar) is a lot more spot on – and has been for the past two months or so. Plus, those swings on the stochastic are a lot easier to read – at least for me.

As you can see the AUD/HKD has been giving up a lot of downside momentum and looks like it’s ready to push above its 80% mark – which could give it as well as equities a boost to the upside. Assuming of course it can push above and does not get embedded below that line (i.e. the inverse of what happened above the 80% mark and produced a strong push higher).

BTW, you can also use the daily chart for a more long term perspective. The stochastic settings I prefer are a little bit shorter but seem to track the longer term swings quite nicely. Timing the ES with AUD/HKD also seems to provide a tighter edge – what do you guys think?

Cheers,

Mole