(This is an excerpt from an article I originally published on Seeking Alpha on August 20, 2012. Click here to read the entire piece.)
A reader recently asked the following questions in response to my last piece on the relationship between the Australian dollar and the S&P 500 (“A Bearish Divergence As Australian Dollar Stalls While S&P 500 Jumps“):
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You can find my initial response by clicking here, but I thought I would take some time to give an even more complete response. {snip}
My current hypothesis for the relationship between the Australian dollar and the S&P 500 is this:
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In summary, turning points should show up in Australia first given its smaller size relative to the market for U.S. financial instruments. The highly correlated trading occurs because the motivations for pursuing higher relative yields in currencies and higher relative safety (equating to returns) in equities are closely related. This correlation will likely only break down if, for example, the Australian economy experiences a country-specific calamity.
There is significant disagreement in the financial community about the fundamental health of the Australian economy and its future prospects. {snip}
On a related note, I have mentioned in previous posts that I would cobble together the evidence and explanations I see and hear for the Australian dollar’s strength. I present here select commentary from the always insightful guests on “Hard Currency” the Financial Times’ weekly currency podcast. {snip}
{snip}
Be careful out there!
(This is an excerpt from an article I originally published on Seeking Alpha on August 20, 2012. Click here to read the entire piece.)
Full disclosure: net long Australian dollar (at the time of writing)