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03/15/2012 2:32 pm EST
Correlations between the currency markets and asset classes like commodities and stocks are critical, explains FOREX.com's Daniel Hwang, who covers these correlations each week.
FOREX.com is known for its great commentary for short-term and intermediate-term currency traders. Our guest today is Dan Hwang, one of the commentators on their site. Dan, talk about the analysis your team does.
Well, first off, what I do is focus on correlations on a weekly basis. I publish a weekly Correlations Corner, which takes into consideration and puts out a matrix for correlation coefficients between currencies and other major asset classes. Currency traders can then keep an eye on what relationships are converging and which are diverging.
Alright, is it metals and gold; that sort of thing?
We do take a look at metals and gold, as well as crude oil prices, but typically, what we’re also looking at the S&P, as we are seeing cyclical highs between our cost correlations at this time.
What are your thoughts here on the euro and maybe the dollar as well?
We think there is some risk for the euro to head higher. I think positioning still is pretty heavy on the short side, so what we could see is the euro try to move towards 1.3850, 1.39, but I think ultimately the Eurozone does need to restructure.
I think the fundamentals will start to play out again and we could see the euro start moving lower towards 1.30, possibly even toward 1.25.
How much weight do you put on all the news we hear from Europe? We’re hearing the euro is going to break up, the Eurozone is going to break up. What’s the weighting for that kind of news and the technical chart?
I think as traders, we need to try to funnel out some of that noise from the headlines, as traders try to focus on the tape: what price action is showing us and the longer-term fundamentals.
See related: Why Traders Should Ignore the News
What’s really disrupting the Eurozone at this point? If it was really just a matter of Greece, the think the euro should be higher at this point, but it’s not. It’s really a structural issue, and I think in 2012, we’re going to see that start to play out a little bit more.
Are there any other currency pairs, outside of the EUR/USD, maybe that you’d play Europe with and try to make some profit there?
I think the British pound sterling (GBP) is a good currency pair to look at at this point. The UK is probably going to have to take on further asset purchases next year.
In terms of US data, we are starting to see US data improve. Interest rates are not going lower, so there is a bit of a divergence between rates as well. I think the GBP/USD is another pair that could see further downside.
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