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Currency Currents

Tue, Nov 27 2007, 13:07 GMT
by Jack Crooks

Black Swan Capital  |  View company's profile


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FX Trading – We keep thinking – wouldn’t today be a good day for a dollar bounce! 

And of course, each day we think about that, we are usually wrong.  But as the ambulance chaser JJ used to say, “Keep hope alive.”

Yesterday we showed a couple of charts during a webinar that thankfully the viewers found interesting.  We continue to find them interesting.  And it’s why we keep thinking about a dollar rally, or we should say, dollar correction scenario. 

The first chart below shows the relationship between the US dollar index and crude oil.  And what a relationship!  Based on our rather simple calculations, this pair has an 89% negative correlation.  That’s pretty tight no matter who you are. 

 [chart not available in text format]

The chart above tells us that when crude goes up in price the US dollar index goes down in price.

Now we complicate the mix with one more overlay…Crude vs. Copper vs. S&P 500…

 [chart not available in text format]

When we look at this, we see two key indicators that usually do a decent enough job of forecasting future growth in the economy, stocks and copper, telling a different story than crude oil. 

We know growth forecasts are being marked down in a lot of places around our globe, not just in the good old USA.  Yet, crude oil pretends none of this is happening.  It continues its charge into the nose-bleed seats.  In short, a big divergence has opened up; all three series tended to support one another in the past.   So, if crude oil is wrong, and crude and the dollar index are joined at the hip (-89% correlation), just maybe the dollar can get off the canvas for a bit—maybe even struggle to its feet before taking yet another haymaker from Mr. Euro. 

Who knows?  Stranger things have happened.

Jack Crooks
Black Swan Capital

Published on  Tue, Nov 27 2007, 13:08 GMT


Black Swan Capital LLC http://www.blackswantrading.com | jcrooks@blackswantrading.com

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Currency Currents is strictly an informational publication and does not provide individual, customized investment advice. The money you allocate to options should be strictly the money you can afford to risk. While every effort is made to evaluate the actual experience of subscribers, all performance figures must be considered hypothetical, and past results are no guarantee of future performance. Detailed disclaimer can be found at http://www.blackswantrading.com/disclaimer.html
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