AUD/JPY Carry Trade and SP500 Correlation

There is a high correlation between the SP500 and AUD/JPY and also AUD/USD.
This chart shows SPY(SP500 vs AUD/JPY)

Australia's elections over the weekend has resulted in hung parliament, which will take some time to resolve once all the votes are counted. With Issues in Australia over elections we might see AUD/JPY selling (risk aversion/unwinding carry trade) and this will help the bears bring the SP500 down. We are also seeing continued strength in the USD/JPY and Treasuries which has caused weakness in Crude Oil and Copper due to the inverse correlation relationship. (Crude Oil and Metals like copper have high correlation to AUD/USD, CAD/USD, and NZD/USD).

The bear scenario for next week-
SELLING IN-AUD/JPY, CAD/JPY SP500, Crude Oil, and Copper
BUYING IN- JPY vs all currencies, 30yr bonds, and VIX

Here are some old Intermarket Correlation resources from ForexAutomaton the period 2002-2008-

Here are some links that look at Currency Correlation of the AUD/JPY vs SP500 and the current state of 30 year treasuries-

aud vs jpy

Presenting The New Correlation Regime: Treasury Butterflies And Risk | zero hedge

Visualizing The Past Of The Treasury Yield Curve, And Deconstructing The Great Confusion Surrounding Its Future | zero hedge

Will Tonight's AUD Slide Be The Start Of Another Major Market Selloff? | zero hedge

HomeTrader: SP500 update and AUDJPY , AUDCAD and EURUSD.

Lessons from the Pros - 06/15/2010 Issue - Stocks Article: Money for Leads?

ES-AUDJPY "Swiss Watch" Recoupling Means Money In The Bank For Divergence Chasers | zero hedge

... from IDEAtrader Suite

The Rational Move

News | Currency Trading News | Currency Quotes | Commentary | Analysts - FX 360>

Dollar Soars As S&P500 Hits 5 Year Lows - Forex Analysis, Currency Forecast, FX Trading Signal - Action Forex

The Strongest Forex Correlations | Kathy Lien | FX360.com

Commodity Currencies & SPX | Samadhi Research Investments

Forex @ DailyFX - Currency Correlations Tighten Through Risk and Dollar-Based Foundations

Unwinding Of The AUD/JPY And Other Carry Trades Is Going To Take BHP Billiton Ever Lower - theyenguy -- Seeking Alpha

Chronic Deflation Will Send 30-Year Treasuries to 3% (Gary Shilling)

Australia election results point to hung parliament | World news | guardian.co.uk

AUD/JPY Carry Trade and SP500 Correlation

There is a high correlation between the SP500 and AUD/JPY and also AUD/USD.
This chart shows SPY(SP500 vs AUD/JPY)

Australia's elections over the weekend has resulted in hung parliament, which will take some time to resolve once all the votes are counted. With Issues in Australia over elections we might see AUD/JPY selling (risk aversion/unwinding carry trade) and this will help the bears bring the SP500 down. We are also seeing continued strength in the USD/JPY and Treasuries which has caused weakness in Crude Oil and Copper due to the inverse correlation relationship. (Crude Oil and Metals like copper have high correlation to AUD/USD, CAD/USD, and NZD/USD).

The bear scenario for next week-
SELLING IN-AUD/JPY, CAD/JPY SP500, Crude Oil, and Copper
BUYING IN- JPY vs all currencies, 30yr bonds, and VIX

Here are some old Intermarket Correlation resources from ForexAutomaton the period 2002-2008-

Here are some links that look at Currency Correlation of the AUD/JPY vs SP500 and the current state of 30 year treasuries-

aud vs jpy

Presenting The New Correlation Regime: Treasury Butterflies And Risk | zero hedge

Visualizing The Past Of The Treasury Yield Curve, And Deconstructing The Great Confusion Surrounding Its Future | zero hedge

Will Tonight's AUD Slide Be The Start Of Another Major Market Selloff? | zero hedge

HomeTrader: SP500 update and AUDJPY , AUDCAD and EURUSD.

Lessons from the Pros - 06/15/2010 Issue - Stocks Article: Money for Leads?

ES-AUDJPY "Swiss Watch" Recoupling Means Money In The Bank For Divergence Chasers | zero hedge

... from IDEAtrader Suite

The Rational Move

News | Currency Trading News | Currency Quotes | Commentary | Analysts - FX 360>

Dollar Soars As S&P500 Hits 5 Year Lows - Forex Analysis, Currency Forecast, FX Trading Signal - Action Forex

The Strongest Forex Correlations | Kathy Lien | FX360.com

Commodity Currencies & SPX | Samadhi Research Investments

Forex @ DailyFX - Currency Correlations Tighten Through Risk and Dollar-Based Foundations

Unwinding Of The AUD/JPY And Other Carry Trades Is Going To Take BHP Billiton Ever Lower - theyenguy -- Seeking Alpha

Chronic Deflation Will Send 30-Year Treasuries to 3% (Gary Shilling)

Australia election results point to hung parliament | World news | guardian.co.uk

USD/JPY vs US Long Term Treasuries

USD/JPY vs US Long Term Treasuries

Where is the market headed?

I don't like to make predictions about where the market is headed, because with my style of trading it doesn't matter (my typical trades only lasts 3 minutes). However, I like to do technical analysis of the stock, bond, and currency markets to see the intermarket relationships that are occuring. My main outlook on the markets is viewed through the use of volume by price charts. Yesterday I said that I saw support in ZN, and today, ZN rallied off the CPI number. Last March, we would have seen the stock indices trade inversely to ZN off of this number, however, the housing number came out and the inverse relationship wasn't seen this morning. I'm expecting ZN and JPY to turn bullish and the stock indices to turn bearish in the next week due to the relationship between the two. Last March, the inverse relationship between bonds and the stock indices was useful for spoting reversals during the volatile trading days we experienced. We had a nice run up these last 2 days in the stock indices. Normally you see 1 big up day followed by a second small up day, followed by 1-2 days of consolidation, and then a pullback. I'm expecting a pullback by the end of this week.





Here is a daily, weekly, and monthly view of ES, ZN, and the EURO.





Here's ZN on top and JPY underneath.



I'm also trying to keep track of the options on SPY, IWM and a few others. Today there was an increase in calls relative to puts, which I think means, people are selling calls. Also a large put position has been taken on IWM for May at $82.

April 2 Trade Summary

Trade summary-
Have work early again this morning and could only trade the first hour. I should have reversed my position and rode the 2nd wave down on YM and ER2. I will work on this by trading YM which has less risk. Probably should have traded 2 contracts on JPY and held 2nd contract for a larger profit target, I didn't expect a second drop down. I didn't look at the P/L today. My goal is to wait until the end of the week. I watched block trades and time and sales for my scalp entries this morning. NASDAQ A/D started out bearish as a leading indicator to the downside before the ISM #, and didn't show some bullishness (or short covering) until 10:30am EST.

Market observations-
Bond futures and JPY acted inversely to the stock indices again today. JPY lagged behind the EURO and I saw declining volatility in the bond futures and currencies as usual after the first hour of trading, expecting choppiness and probably a fade of the highs into the afternoon.

March 27 trade summary

I didn't do much today because I've got the flu. I placed a lot of scalp trades mentally and did some research while watching the market. I'm going to spend some time today and focus on posting my favorite trade setups. This has been something that I've been wanting to do, but I keep getting side-tracked by reading and learning about other things. Today we had a nice reversal setup at 11:30am EST (key reversal time) and there was confirmation by JPY (trading inversally) reversing at the same time. Obviously tommorow is the big day with Bernanke speaking, and if you hadn't noticed we have a volume gap to the downside for all the indices due to last wedensdays FOMC announcement.

Open interest and intermarket relationships

I'm doing my homework on open interet for options and futures between the stock indices, bond market, and forex market. I found a CBOT headline from last May about how the 2year note hit an all time record in open interest on May 10th, the same date the Dow was at its high for the year. The next day, May 11th, the dow began its correction for the year.






Also noted recently by many blogs such as Tradersfeed and the Vix blog was the extremely high put/call ratio seen in the equities market at the beginning of this last week. I'm sure all the shorts know what happened this week and are starting to look into how open interest and put/call ratios may be a good indicator of where future price may go.

When the fed decided not to cut rates, I should have shorted the spike up in bonds, and played the reversion to mean, because if interest rates are unchanged, then there really is no reason for bonds to be that high just based on a comment of a possible tightening of rates in the future, and the same goes for the pop up seen in JPY. This is another reason why education in bonds, forex, and economics will help me in my trading in understanding the fundamental reasons behind the moves I see in my charts, instead of going on the false assumption that a price movement is because of a technical indicator or trend line.

March 23 Trade summary

The only good setup this morning was the reversal on YM/ES after the pop from the news this morning. I missed that move, and then decided to try to get a reversal setup on JPY based on what I was seeing in ZN and the EURO. The trade took forever for just a small scalp and I didn't feel like waiting all day for the trade to work out because today looks like it's going to be a chop fest and I have other stuff to do today.

Overall this week was a little tougher to trade because of the effect the FOMC announcement had on the markets. I did ok for the time I traded and I'm starting to learn a little about bonds and forex to progress my trading.

Yaser Anwar made a recent post on how he trades Futures, Equities, and Forex- I like his style of trading, and I have a similiar approach. I believe that looking at other markets such as the Forex market and the futures for stock indices and bonds will make you see the market as a whole and you will start to see patterns develop on how all these markets interact with one another. For instance the pattern that we have seen for some time now is the inverse relationship between the Yen and the US stock indices, which is due to the affect of the Yen carry trade.
Also, the bond market and the Yen have shown a close correlation between one another as well.

I found a small article that explains the basics of the carry trade:
Yen carry trade - implies borrowing Japanese yen at low interest rates (0.5%) to finance purchases of high-yielding assets. The investor earns the interest rate spread or "carry" as long as interest rates in Japan do not rise (increases borrowing cost) and exchange rates are stable (exchange rate risk if the yen appreciates).

To briefly explain the process, Japanese yen is borrowed at very low interest rates. The yen are sold to buy a stronger currency. The new currency can be used to purchase a high-yielding asset. At the time of unwinding the trade, the asset is sold to obtain the principal and interest in the underlying currency, which in turn is sold to buy yen and repay the yen denominated loan.

Such a trade can be hedged at about a 100bp (1%), so if an investor borrows from Japan (@ 0.5%) and invests in US treasuries at 4.5%, he clearly earns 300bp (3%). The yen carry trade has been like a continuous money generating opportunity for big investors. Trillions of dollars are estimated to be in this trade, which has indeed been profitable for investors.(Yen Carry trade article, courtesy Poonam Bhana)

March 21 Trade Summary

I decided to scalp the first hour and now I'm going to sit back and watch. My scalping skills kinda sucked, but I still came away with some profit with the small opening range on ER2. If I would have held my short on YM from that weak short covering rally at the close yesterday I would have made a profit. I'm not too mad about that though because I hate having to stress about holding positions overnight, and If I wanted to I could have shorted at the open to hold true to my confictions.

I think the market is going to go down. The Yen and bonds are on support, and the stock indices have overhead resistance. The best trade right now is probably buying vix calls. I honestly don't think there is anything new that Bernanke could say that the smart money isn't already aware of. I'm going to try to do an inverse pair strategy on the simulator by going long JPY and long ER2 as a hedge.

Market outlook for march 19 2007

It's Sunday night and the US futures are up big, about 6pts on ES, 4.5pts on ER2, and 42pts on YM. Why? JPY and US bonds sold off to reaction to China's interest rate hike and the Asian market is trading up. The chart for the last month tells a different story of where things look like they are headed.

The market looks setup for a selloff. Vix and bonds on support, JPY has a bull flag, and tommorow is the day after option expiration. I will wait for my signals, but things don't look good for the bulls.

I'm a little scared of this next week, but I think I have to face my fears to become a better trader. Good luck to all those trading next week, unless of course, your the one taking the bet against me.

March 14 Trade Summary

Well this morning showed some great volatility and I was in the zone. I had no fear or flight or fight responses today when trading, it was all gravy. What happened, and what made the difference today??
In one word: BONDS
I've been missing out on the the best indicator of all that I just recently started watching this last week, and today it was a beauty. The reverse correlation between the stock indices and ZN/ZF is the best indicator for spotting reversals "CURRENTLY", especially when you see volume piling up in opposite directions. If you also watch Yen/US dollar, you can see the same pattern, with the yen/us dollar being a leading indicator for some of todays action.
I'm done trading today, I'm not in the zone any longer, so I'm not getting back in. I'm taking the money and running.
I made a video from this morning, which is going to be great to watch.
I also made the decision last night to do away with all of my indicators. The only indicators I need is price and volume. So, I'm still using volume profile and VWAP, everything else I see no use for.
I noticed today my eyes were glued to ZN, ES, JPY, and ER2. I occasionally glanced at NYSE A/D and my SPY chart which shows block trades.
What did I do wrong today:
1.I bought YM and didn't exit for a quick loser, instead I let the trade take a large negative drift of 50pts, only to later make 30pts in profit, it ended up going 120pts my way.
2.I bought ER2 1 tick away from the low at 667.8, and put in a quick scalp profit and exited for only +0.7pt in about 30seconds, Sounds good right,,,NOPE,,,,,,, it ran 14pts. That is really hard to think about. I missed the forest for the tree leaf so to speak.
3.I should have gunned my ER2 long trade, instead I just kept my YM long(I was thinking I didn't want to be leveraged up to much in one direction)
4.I exited my biggest winner for the day on ER2 for $300 less because I moved my profit target, I admit, I got shaken out. When My original target was hit, the price reversed and made a new low.
What did I do right:
1.I was focused on what mattered, I didn't hesistate, and I stayed true to my conviction on my loser ym trade turned winner(ZN was putting in a double top, that's when I got my quick scalp long on ER2 and new I had to ride out YM).
2.I made money.
3.I stopped trading because I started feeling happy.


Observations:
We had a double top in ZN and a double bottom in ES at 9:57 PFT. ZN was leading indicator for the big reversal.

Final thoughts:
You gotta love todays Volume and Volatility because it is scalpers dream.

Edit: Upon further analysis I could have traded better today. I should have stayed focused on trading the setups instead of my P/L. I missed out on making more money by looking at my account and felt that todays profit was good. I need to stay focused and trade the setups. Get rid of the P/L and unrealized P/L. Use your stops, accept small loses, and keep trading and look for potential runners when you got momentum.