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Correlations Tight As Dow Meltdown Triggers FX Crash

By Kathy LienForexSep 20, 2021 05:36PM ET
www.investing.com/analysis/correlations-tight-as-dow-meltdown-triggers-fx-crash-200602503
Correlations Tight As Dow Meltdown Triggers FX Crash
By Kathy Lien   |  Sep 20, 2021 05:36PM ET
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This is one of the busiest trading weeks of the year, and for this very reason, volatility in the stock market as measured by the CBOE Volatility Index rose to its highest level in four months. The Dow Jones Industrial Average tumbled more than 900 points intraday, settling down 600. The S&P 500 dropped 1.7%, recording its worst day since May. While the Federal Reserve has a very important monetary policy announcement on Wednesday, it wasn’t the Fed meeting that triggered the decline. After subdued inflation and employment reports, economists did not expect aggressive announcements from the central bank. Instead, worries about China and the debt ceiling sent equities and currencies tumbling lower. China’s Property giant Evergrande (HK:3333) is at the brink of $300-billion default, and investors are worried about contagion, as there are significant Western bond fund exposure. 
 
September is traditionally a terrible month for stocks, and after focusing on COVID-19 for more than a year, Evergrande is a fresh shock that could trigger major liquidation over the next few weeks. Market correlations that broke down throughout the year tightened instantly, with the sell-off in stocks driving currencies, bond yields, oil and crypto sharply lower. The breadth of risk aversion is astounding. 
 
In FX, the Japanese Yen and Swiss Franc were the best performers, which is what we’d expect to see when stocks fall sharply. The U.S. dollar traded higher against all of the major currencies except for euro, which was unchanged; the Japanese Yen and Swiss Franc. If stocks continue to fall tomorrow, with the Dow dropping 500 points or more, Fed taper talk on Wednesday pretty much goes out the window. In many ways, the Evergrande mess is a bigger deal for the financial markets than FOMC. With China refusing to rescue the property giant, we expect further weakness in currencies for the next 24 to 36 hours. The U.S. dollar is particularly vulnerable to losses against the Yen and Franc. U.S. housing starts and permits are due for release on Tuesday – the housing debacle in China could trigger a more significant reaction to housing weakness in the U.S.
 
Amidst all of the volatility, there are four major central bank monetary policy announcements this week, an election and a long list of important economic data. Canadians head to the polls today to decide if they want to keep Prime Minister Justin Trudeau in power. A month ago, the prime minister called a snap election two years ahead of scheduled. Now, the race is tighter than he could have ever imagined. Although leadership changes typically do not have a lasting impact on currencies, if Trudeau loses, the uncertainty will trigger near-term weakness in the Canadian dollar. The last polls close 7 p.m. Pacific time, so we should know shortly thereafter, but paper ballot counting could delay the results a few more dates.
 
The Australian dollar remains in focus, with the RBA minutes due for release this evening. The central bank decided to proceed with its taper plans at its last meeting, which was a bit of a surprise, but said rate hikes probably won’t happen until late 2024, which was later than most economist anticipated. Although last night’s NZ PMI services report showed a significant slowdown in activity, the government’s decision to ease restrictions in Auckland helped to prevent steep declines in the currency.
 
The euro was supported by stronger inflation numbers and safe-haven bid. Sterling was one of the biggest losers. The Bank of England meets on Thursday and, with no changes expected, the currency is trading primarily on risk appetite. The BoE may be one of the least dovish central banks, but with stocks falling and the Delta variant spreading, it will be reluctant to even talk about raising interest rates. Its furlough program also ends this month, which could lead to some weakness in the economy. 
Correlations Tight As Dow Meltdown Triggers FX Crash
 

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Correlations Tight As Dow Meltdown Triggers FX Crash

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Comments (12)
Felix Maka
Felix Maka Oct 04, 2021 4:26PM ET
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in your profile I can ear a lot about your trading experience
Felix Maka
Felix Maka Oct 04, 2021 4:25PM ET
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Jennifer Dela serna
Jennifer Dela serna Sep 22, 2021 5:53PM ET
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mehrzad shahbazi
mehrzad shahbazi Sep 21, 2021 12:26PM ET
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kathy..i love you so so muchyou are best 20
Xavier Valente
Xavier Valente Sep 21, 2021 9:18AM ET
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The storm may just started... There's a lot going on... We've China property problems and also insurance and bank problem as a consequence. We also have some trust that was lost between USA and France.  There's a new paradigma called " the next cold war " that is putting together Australia, India, Japan and USA against China... Geographic politics.... United kingdom is distancing itself from EU and looking closer to improve relationships with USA and Australia.  Stock markets are well overbought... Dividend discounted cash flows are considering projections until maybe 2035... that's a lot of years to predict something, a lot... Dumb money and meme stocks are also taking the real worth of things... In my opinion the biggest crash is yet to come. Volatility will be the king.
Thông Vũ
Thông Vũ Sep 20, 2021 8:08PM ET
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Sell and buy.
Engr Prosper
Engr Prosper Sep 20, 2021 6:43PM ET
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buy and sell
AIM Investor Journal
AIM_IJ Sep 20, 2021 6:20PM ET
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From 2009-2015 annual interest paid on US debts did not rise above $250 billion even though the national debt almost doubled in the period. This changed when rates began to rise. The situation now is even worse with interest currently costing $380 billion with rates at record lows. The Fed are predicting annual interest to rise above $600 billion by 2028 as rates rise.
Nick Burns
Nick Burns Sep 20, 2021 6:20PM ET
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hmmm I remember another year in the late 20s that also had a financial crises lol
Paul Co
Paul Co Sep 20, 2021 6:20PM ET
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Currency manipulator to minimize interest payments.
Devkinandan Gupta
Devkinandan Gupta Sep 20, 2021 5:57PM ET
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This meltdown was seen but reason has occurred it seems that meltdown will remains continue till 5 to 7 percent of total correction .as the market not only Indian or us bot have surge beyond the limit. Hence 5 to 7 percent market falls that we can say its better and healthy correction.
Casino Crypt
CasinoCrypt Sep 20, 2021 5:49PM ET
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Don't worry the Fed has propped up equity before through the back door using its many tools . It will always be there . Unlike in the old days.
JonMichael Patrick
JonMichael Patrick Sep 20, 2021 5:43PM ET
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umm a meltdown would take the dow back to 16000 where it really belongs looking at 15-30 year charts lol.
Casino Crypt
CasinoCrypt Sep 20, 2021 5:43PM ET
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100% agree. They played with the fuel constancy so now you have a economic rocket that  is tilting back at forth trying to stay vertical.
Courtney McKay
Courtney McKay Sep 20, 2021 5:38PM ET
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Im glad i got out of my trade early
Precious Idemudia
Precious Idemudia Sep 20, 2021 5:38PM ET
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a buy or a sell?
Nick Burns
Nick Burns Sep 20, 2021 5:38PM ET
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buy was at the end of the day sell might be wed again
 
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