From the December 01, 2011 issue of Futures Magazine • Subscribe!

The currency/equity partnership

Forex Trader

Market turbulence this year has made it more challenging for traders to separate the noise from the signal. The globalization of sentiment has generated correlation among sectors. Problems in the Eurozone cascade into U.S. markets every week. Currencies have responded with a vengeance, as the mood of the market has shifted from euphoria to regret and returning to fear. The resulting uncertainty has caused "safe-haven" responses in the U.S. dollar, gold and the yen. These conditions make inter-market analysis more important than ever.

To gain greater granularity about these complex forces affecting prices, traders should look closely at the relationship between equities and currencies. The fundamental forces that cause currency valuations to change also cause equity valuations to do the same. There is no place to hide. The question arises: How can the forex trader improve his inter-market analytical skills? While we can’t track all of the currencies here, we can pinpoint some major inter-market currency and stock co-movements that can be useful to traders. We will review the Australian dollar (AUD/USD), Japanese yen (USD/JPY) and Canadian dollar (CAD/USD) and pinpoint their most relevant equity partners.

The Aussie is a good place to start because its valuations are triggered by global commodity market conditions. Strong growth in the global economy, particularly in China, often translates to higher demand for Australian resources. Instead of tracking demand for a large basket of commodities to measure Aussie prospects, a trader can track Freeport-McMoran Copper & Gold (FCX). Freeport is the world’s largest publicly traded copper company. It is projecting 2011 sales of about 3.8 billion lbs. of copper and 1.6 million ounces of gold, which makes FCX’s correlation with the Aussie among the closest of any equity-currency pair (see "Follow the copper"). The correlation percentage reached 0.8 in November.

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