Dollar to Dow correlation

[sishya]

I read a recently an article about Dow and Dollar correlation.

It was talking about S&P to Dollar correlation.
Now looking back, can we draw this inference ?

Pre 2000 : Dollar up, Dow up
2000-2002 : Dollar up, Dow down
2002-2008 : Dollar down, Dow up
2008-2009 : Dollar up, Dow down

Next : is it going to be Dollar down, Dow down ?

if so then Dow to Gold ratio can fall. I am personally still bullish short-term on Dollar. For longer term to help dollar, All we need is some new scientific innovation(like Internet) to bring help the economy.


The Almighty DollarThe next two graphs show how the markets have moved with the dollar in the 21st century.

[Mega]

Re: Dollar to Dow correlation

Am guessing but i suspect a falling $ floats all boats:-
Gold
Silver
Oil
Dow

Mike

[chr5648]

Re: Dollar to Dow correlation

when dow and dollar move in opposites it is the carry trade, just watch what happens to yen cross pairs (eu/jpy, gbp/jpy, usd/jpy, aud/jpy) when the dow hits key support/resistance levels

[WildspitzE]

Re: Dollar to Dow correlation

Thank you chr5648. Can you elucidate more for the benefit of the gang?

[chr5648]

Re: Dollar to Dow correlation

Here are some good examples

http://www.investopedia.com/terms/c/...carrytrade.asp

Here's an example of a "yen carry trade": a trader borrows 1,000 Japanese yen from a Japanese bank, converts the funds into U.S. dollars and buys a bond for the equivalent amount. Let's assume that the bond pays 4.5% and the Japanese interest rate is set at 0%. The trader stands to make a profit of 4.5% as long as the exchange rate between the countries does not change. Many professional traders use this trade because the gains can become very large when leverage is taken into consideration. If the trader in our example uses a common leverage factor of 10:1, then she can stand to make a profit of 45%.

http://en.wikipedia.org/wiki/Carry_%28investment%29

Essentially you can replace the bond with dow, s&p, commodities and such.

The key though is the correlation with the DOW FUTURES.

The term carry trade without further modification refers to currency carry trade: investors borrow low-yielding and lend high-yielding currencies. It tends to correlate with global financial and exchange rate stability, and retracts in use during global liquidity shortages.^[2]

The risk in carry trading is that foreign exchange rates may change to the effect that the investor would have to pay back more expensive currency with less valuable currency.^[3] In theory, according to uncovered interest rate parity, carry trades should not yield a predictable profit because the difference in interest rates between two countries should equal the rate at which investors expect the low-interest-rate currency to rise against the high-interest-rate one. However, carry trades weaken the currency that is borrowed, because investors sell the borrowed sum and convert it to other currencies.

By early year 2007, it was estimated that some US$1 trillion may be staked on the yen carry trade.^[4] Since the late-1980's, the Bank of Japan has set Japanese interest rates at very low levels making it profitable to borrow Japanese yen to fund activities in other currencies. These activities include subprime lending in the USA, and funding of emerging markets, especially BRIC countries and resource rich countries.

According to Gary Dorsch of Global Money Trends, the yen carry is a "weapon of mass destruction" of $5.9 trillion, with yen loans another 1.2 trillion dollars on top of it, making Arabian oil wealth or Chinese reserves look small at $1.5 trillion and $1.9 trillion respectively.

The correlation can be seen on a short time frame and long term time frame.

Since banks and many institutional traders have real time access to borrow and repay yen, many times when a key support/resistance level on the DOW FUTURES is hit, It corresponds with yen.

Say the Dow futures hit the 8/28 high of 9637, and they start selling. Then you will see eu/jpy, gbp/jpy, usd/jpy, aud/jpy sell off as JPY are repatriated to Japan.

You can trade this but you have to be good with support and resistance. Also I would suggest using DOW FUTURES which is much better then the generic DJIA.

[WildspitzE]

Re: Dollar to Dow correlation

Thanks for taking the time, I thought that the second part of your response is what would be of interest to fellow itulipers (since most know what a carry trade is). Watching eurjpy is key imo, if for no other reason that everybody is acting on it .

[ThePythonicCow]

Re: Dollar to Dow correlation

Thank-you, chr5648, for the yen carry explanation. It was helpful.

Dang, this looks like just another fountain of debt paper, little different than Fannie and Freddie, the U.S. Treasury or many banks. Everything in sight that can be monetized is monetized, in order to create more debt. In this case, the Japanese were reluctant to directly invest the great earnings from their Miracle Years in foreign assets, so it is done indirectly, via the Japanese government loaning Yen to all takers for essentially no cost.

This is One Freakin Huge Debt Bubble (OFHDB)!

[snakela]

Re: Dollar to Dow correlation

Don't all the CBs except Aus have a zero interest rate policy? Doesn't it seem pointless to borrow Yen if you can get it free from BB without the exchange rate risk?

[chr5648]

Re: Dollar to Dow correlation

Don't all the CBs except Aus have a zero interest rate policy? Doesn't it seem pointless to borrow Yen if you can get it free from BB without the exchange rate risk?

Yeah this is something that I too have been wondering the past 12-18 months.

I'm assuming that either they have the relationships built over the past (10-30) years that allow for a really liquid and quick market in yen or the difference in interest basis point relative to other currencies is sufficient to warrant the use of yen.

This I am not exactly sure of. I just know the relationship exists and trade it.