What a week this has been. This commentary used to be all about FX, but as we have seen yet again, its equity market moves that have taken center stage. Day after day we have seen equity markets rally with the Nasdaq making a new all time high above 10,000. All of this in the face of an ongoing global pandemic, record unemployment, a global recession which some would refer to as a depression and a big dose of uncertainty. Read any respected financial newspaper or listen to the talking heads on the usual TV channels and we hear the same thing over and over. How can this be? Has the market lost all sense of reality? Should a bankrupt company like Hertz really rally over 1400% off it’s lows? Do traders understand bond holder rights over equity holders? Apparently not. What is going on!?

Financial markets have a wonderful way of giving us all a reminder that things have gotten out of whack. Thursday would be that day with major indices losing over 5% of their value in a frenzied sell-off. Fed Chairman Powell had re-iterated the Fed will use every tool in their arsenal to support markets and the economy. But he also gave a realistic evaluation of the economy and the timeline to get back to pre-Covid 19 levels of employment and growth. If traders refused to heed warnings from so many respected market players, this was one they could not ignore.  And so we saw the deepest sell-off since early March. Friday in a way would be more volatile than Thursday. At least Thursday was pretty much one-way traffic. Friday would see  a rally of over 800 points for the DJ followed by a complete reversal into negative territory before finally closing  up 477 points. FX has become almost completely dependent on equities for direction, with the popular trade being USD purchases when equities go down and the reverse when they rally.  Take a look at the attached AUDUSD chart if you don’t believe me. More on that below. Over 2 days EURUSD would drop from above 1.1400 down to a low of 1.1213 before closing at 1.1260. GBPUSD would swap a 1.28 handle for a 1.24 handle before ending the week at 1.2550. Across the board it would be a similar story except for USDJPY that still likes to adhere to the ‘risk-on, risk-off’ rules of engagement. To conclude this was the week when we got the reality check. Will it be a short-term blip or the start of a more medium-term reversal. And when will FX get a mind of its own once more? Some interesting days ahead.

As already mentioned, FX now trades at the mercy of the equity markets and nowhere is that demonstrated more acutely than with AUDUSD. The attached charts shows the Aussie (green and red) plotted against the Dow Jones Industrial average (blue). You don’t have to be a statistical genius to recognize the correlation. And no, I don’t think your average US equity trader is staring at the AUDUSD for direction either! For now this is an equity led FX market.

David Hannigan
Author

A graduate of the Cass Business School, Dave's career began with Credit Suisse as an Equity Options Trader on the London Stock Exchange, before moving into the world of FX with Chemical Bank and Citibank. 1994 saw him join National Australia Bank, first as a Senior Dealer, then Senior Vice President and Chief Dealer.

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