When making trading, it is looking good correlations between assets and one refers to several approaches that can coexist:
- Assessing the market psychology and understanding the level of risk aversion of market participants.
- Fundamental analysis through the publication of macroeconomic indicators and anticipate monetary policy decisions by central banks.
- Analysis of anticipation transaction flows and stock structure of stakeholder positions weight that are central banks, large institutional and Global Macro Hedge Funds …
- Technical analysis useful when the first 3 do not usually detect relevant market movers.
The difficulty is knowing what approach should overweight and especially how the overweight?
Imagine financial markets as market mover is finally risk aversion (see Approach 1), since bad U.S. macroeconomic statistics (rising unemployment, falling consumption) will paradoxically strengthen the dollar (currency which has – wrongly or rightly – any increase in risk aversion called active) and will therefore result in a decrease of EUR / USD and lower indices.
However, if the market mover is rather an analysis of the situation (cf. approach 2), the conclusions will be different. Indeed, the same bad U.S. macroeconomic statistics this time will result in an increase of the EUR / USD because the perceived breakdown of the economy will strengthen expectations of further monetary stimulus (the famous quantitative easing (QE) or printing money to U.S. central bank), which is likely to depress the dollar. Similar reasoning could be held in the presence of the publication of good U.S. macroeconomic statistics.