Grkfx, I was reading your daily habits and I noticed a few small things…
You wrote: Why is the Nikkei down, while USD/JPY is relatively flat?
I have this as one possible explanation: Big drop in the Nikkei overnight on better Japanese data prompting Amari and Aso to say the sale tax increase should go as planned
Another thing is you don’t seem to pay much attention to the ongoing currency crisis in India and the other emerging markets, why is so? Is it that you don’t think it can have much impact or is it that it is too hard to quantify thus you prefer to keep your focus on the known stuff? I think it has been acting as one more bearish order flow for the commodity bloc as the market may anticipate a lower demand for commodities as their currencies lose purchasing power and their central banks hiking rates to protect their currencies dampen growth prospects. It also adds to risk-aversion in general. I also read a few times that some of the money flowing out of emerging markets may be going to the Euro-zone and thus supporting the Euro.
About the U/C, you have been questioning yourself as whether the poor Canadian data may prompt the BoC to take any dovish action. I think the market has already started pricing in such dovish action/rhetoric. U/C doesn’t rise so much on the release of weak data but if one pay close attention you will notice that it always rise before the data and thus you see some profit taking on the release as the market seems like pricing in weak data. So if the BoC doesn’t do anything on Wednesday U/C may obviously fall on disappointment. Grkfx, my question here would be if the data continues to deteriorate would their be a point where the market would start to sell the CAD even if the BoC doesn’t seem to want to take any dovish turn?
Correlation / Divergence
Yes, part of the daily habits is I try to identify any potential anomalies and divergences between correlations. And I write in those little notes into my correlation/sensitivity sheet and master files. They can sometimes present some interesting trading opportunities, or other times they can be meaningless.
Any time such a divergence and anomaly appears, you can either:
- Bet on the divergence widening. Ex – If the Nikkei is down, while USD/JPY is flat, you can bet on this divergence continuing or widening by shorting Nikkei, while at the same time buying USD/JPY (as a sort of spread trade, which I don’t do, but some people specializes in spread trades).
- Bet on the divergence narrowing – Ex if the Nikkei is down, while USD/JPY is flat, you can bet on this divergence narrowing, by buying the Nikkei and shorting USD/JPY.
- Or you can analyze both the markets and figure out which market is making the “real move” according to the near future news/sent/fund/macro order flow. If you believe that the Nikkei down move is the real move, then you can short USD/JPY. Or if you believe that the USD/JPY staying steady is the real move, then you can buy Nikkei and play for a snap back.
- Or you can do nothing and wait for more information. The situation can be confusing so you may want to stay out.
That is one potential explanation that you mentioned why the Nikkkei dropped. Although I have heard of conflicted theories. Some people say that if the sales tax is delaying or watered down, that could actually be bearish for the Nikkei because it is an important fiscal reform to get the budget under control and without it, Japan’s debt can balloon. Other people say that if the sales tax is delayed or watered down that is bullish for the Nikkei because there will be more domestic consumption, etc.
Another theory why the Nikkei dropped on Friday, while USD/JPY stayed steady was due to some lingering Syria fears which caused a tad bit of risk aversion in the equity markets. USD/JPY actually did go lower with the Nikkei during the Asian session and Europe session, but it bounced back higher during the NY session as the USD was slight bid on safe haven bid.
As for the India crisis, I have not been paying attention to it due to lack of time. I usually don’t specialize or analyze the Scandinavian currencies or Pacific countries, etc. In an ideal situation I would shift my focus to the currencies around the world that have the strongest chance of making a big “global macro move.” So ideally I should have dropped analyzing such the CHF and pick up another currency that has the potential to make a big move. I usually just keep on focusing the habits on the currencies I already trade, since I know them well, not only do I stand a decent chance of catching a macro move in them, but such detailed knowledge gives me the ability to place some tactical trades and intraday trades in them as well. It is a lot easier for me to day trade the EUR/USD than it is for me to day trade the USD/INR, due my knowledge, but also to general principle such as large spread in USD/INR.
There are many hedge funds that have specialists that analyze Scandinavian currencies, Pacific Rim currencies, etc. I just have my hands busy with the currencies I already trade, plus some futures markets like S&P, bonds, etc, and whenever I get a decent scenario for a stock play.
It seems there were a few more macro trades based on the whole Asia slowing down theme. There was the AUD short earlier in the year. Then it seemed like many Asian economies were hurt by the surge in global bond yields. Not all of them could handle the slower growth combined with the surge in bond yields. It seems India got particularly hard hit as its currency plunged.
I would say that if the BoC firmly rejects any dovish action, then the weaker data shouldn’t affect the CAD too much. It is possible the CAD can sell off on the weaker data after a firm BoC statement that they won’t do any dovish action. But the reward risk may be poor for a CAD short, because any bearish CAD macro forces will be fighting against any bullish CAD macro players expecting the BoC not to do anything and general profit taking, etc. So it can be kind of choppy. Of course, you can also keep on tracking the news impacts and sensitivity to see what happens.