The Currency/ Equity Partnership- Dancing with the Stocks

The Currency/ Equity Partnership- Dancing with the Stocks By Abe Cofnas

It has been quite a year of market turbulence making it more challenging for traders to separate the noise from the signal. The globalization of sentiment has generated close co-movements among global sectors. Problems in the Eurozone cascade into US market reactions 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 with the US Dollar, Gold, and the Yen to act as refuge from the onslaught of fear. 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 the currencies. The fact is that the fundamental forces that cause currency valuations to change also cause equity valuations to change. 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 andstock co-movements that can be useful to traders. In this column we will review the AUDUSD, USDJPY, MXNUSD, and USDCAD  and pinpoint their most relevant equity partners.

First, let’s consider the Australian Dollar.  The “Aussie” is a good place to start as it provides an excellent source for information on the world economy. This is because its valuations are triggered by commodity market conditions. Strong growth in the global economy, as well as growth in China often translates to higher demand for Australian resources.  But it is not an easy task for the average trader to analyze every day global conditions.  Instead, a short cut way of tracking the prospects of the Aussie, as well as commodity markets, is to track the equity Freeport-McMoran Copper & Gold (FCX).  Freeport is “the world’s largest publicly traded copper company. It is projecting 2011 levels of sales of about 3.8 billion lbs of copper and 1.6 Million ounces of Gold in 2011. This global presence makes FCX ‘s correlation with the currency pair among the closest of any equity-currency pair.  The correlation percentage was approximately 20% in September and has reached by November 80%.  In trading the AUDUSD, watching FCX is a must.



Let’s navigate to North America, where we have the Mexican Peso and the Canadian Currency to evaluate. The Mexican Peso presents an interesting case where currency traders can look outside of  Mexican exchanges for the appropriate equity tracking partner. The Mexican Peso has been directly affected by fear of contagion of the Sovereign debt crises. 

This relationship is more psychological than economic.  But it exists and at times the correlation is near zero and other times near 100%..  Traders should  also look to the influence of China on the Mexican Peso and they should follow the ETF (PEK) .





Let’s turn to Canada. The Canadian dollar, is impacted both by expectations on Crude Oil prices, as well as US growth.  Approximately 80% of Canadian exports are to the US and this generates an intimate linkage in the valuation destiny of the Loonie. As a result, when Crude Oil prices increases the Canadian dollar strengths against the US dollar. Concomitantly, when the S&P 500 strengthens, it generates increased confidence in greater demand for Canadian exports and the Canadian dollar also increases. Note that on a chart, the relationship in the USDCAD, OIL and S&P 500 is seen as an inverse relationship.





Overlaying a currency price chart with the chart of its key equity partner provides the trader a quick visualization of conditions.  But there is more than what is seen at the surface.  Ask yourself, are the co-movement patterns changing? Is divergence occurring?  Changes in their co-movements are important clues that the key fundamental conditions creating the correlations are shifting. Weekly chart patterns provide an effective level of robustness.  The weekly pattern filters out the noise and lets the trader see larger changes.  Another advantage of looking at key equities that track currencies is the ability of the trader to obtain a great deal more information about global conditions.

Equities have extensive  data bases about their companies performance as well as forward-looking statements. Reading their quarterly 10k reports on a routine basis will provide insight into currency and global economic conditions.  Importantly, the forex trader can use the options market for trading the currency effect. Puts and Calls on the equities provide valuable sentiment information about expected direction that can confirm which directional strategy the forex trader should use. For example, if the puts/call ratio is very large, it may signal a contrarian strategy is worth exploring.  In any case, it should be clear that just looking at the spot currency price is no longer enough.

It may take a bit more work for the currency trader, but a focus on the equity-currency connection is likely to give the forex trader an extra edge in these times of globalization of markets.