Beyond the fact of overweighting a particular market mover, there is little point investing or trading in its correlations if one is in market situations “manipulated” or at least temporarily under the influence of stakeholders who have significant stocks of important positions and have a P & L (Profit & Loss) to maintain or boost.
Take the example of the EUR / USD (although it is known that the foreign exchange market is the market the less manipulable). If a significant player sees his salvation in the short term by the falling dollar, it will deploy market propaganda that goes with it so simplistic and effective.
- Bad U.S. economic figures involve the need for an accommodative monetary policy of the Fed, so expectations of new QE and self-justify the desired drop in the dollar: the most influential analysts will relay this message.
- Conversely, if the U.S. figures are good, it means that the U.S. economic recovery is underway and this will anticipate a rise in risk appetite and to remove the dollar as safe haven asset nickname, promoting and lower still awaited.
All this will not prevent the same or another significant player to hold the propaganda against it if necessary a few sessions later. This time, so we will have to justify the rising dollar against all odds. We can still count on the most experienced analysts and listened to explain the opposite of what they “sold” a few days earlier (you talked about financial crisis: let’s talk about the financial crisis which is however not our enemy).
- The poor U.S. figures imply an increase in risk appetite and thus the dollar. Omit this time to highlight the risks of QE for the greenback
- While the U.S. will involve good numbers of rising expectations FED FUNDS or at least stop falling FED FUNDS (still today setting monetary policy of zero makes the margins zero down) and thus justify the increase of a dollar more rewarding.
So you believe the observation of correlations for credible investment strategies or trading it may be quackery?