It's all about the Oil...

"Normal" equity / currency correlation has been all but forgotten these past few weeks as Oil continues to push new highs. In "normal" markets our beloved pound yen cross normally follows major equity markets, sometimes almost to the pip; If the DOW has a bull run, the GJ pops a few hundred pips, if the Nikkei rallies, so does the GeeJay, and so on. The basic idea behind this correlation is that if stocks are on the rise investors pull from their cash reserves to invest, thus "selling" their cold hard cash in order to buy stock. The opposite is true in a bear market, however this correlation has been put on ice due to the huge world wide concern over rising oil prices.

There are many possibilities as to why a higher oil price effects the FX market; one, commodity buying; the price of oil has risen so quickly that many investors are pulling money out of equities and diversifying into commodities, which causes a bear run on the equity markets. Two, fear; those investors that are holding stocks yet see commodities as a risky adventure are either standing aside and loosing money, short selling the market, or simply throwing in the towel. All of these actions have a negative impact on the equity markets. Three, capitulation; some investors think this has already begun and some, myself included, think it is just around the corner. Capitulation is when a market bottoms and investors flock in to pick up bargains, think midnight madness sale. When this happens a bear market can suddenly turn bullish, however because a lot of new money is being pumped into the market the large equity rallies can actually throw a countries currency into a downward spiral.

All in all, trading the FX market over the past few weeks has been very interesting. The overall lesson is that no matter what you read or hear follow your charts, they, unlike most media and governmental addresses, don't lie.