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Canadian Dollar, Oil Correlation Nets Big Gains As Carry Trades Fall

The currency trading portion of the contest has proven to be very exciting, and on Friday we saw that the top 3 leaders from Thursday held on to their spots. Indeed, contestant number 1 ended Friday with a portfolio balance of $159,643.39, and while this was actually down slightly (less than 1 percent) from the day before, his net GBP/JPY gains have been large enough to keep him on top. Likewise, the British pound was very good to contestants 2 and 3, who ended Friday with a balance of $158,254.90 and $151,112.35, respectively. (For more on the specifics of these traders’ positions, check out our Currencies Update from May 30.)

However, the lucrative carry trade positions that have propelled these contestants to the top since the beginning of the contest have started to turn against them. Looking at daily charts of the some of the most frequently used carry trades - including USD/JPY, GBP/JPY, and EUR/JPY - it is clear that all of them have run into critical resistance levels. More specifically, USD/JPY backed off from the January lows and pivot resistance near 105.68/95, GBP/JPY plummeted from the psychologically important 209.00 level, and EUR/JPY tumbled from a falling trendline that has served as major resistance since mid-2007. Meanwhile, US stock markets have started to pull back sharply once again, and given the correlation between forex carry trades and equity markets, it is clear that there are significant downside risks for both markets.

What are some of our up-and-coming contestants trading? On Friday, the trader portfolios with the largest percentage daily changes were up over 13% as they closed out long EUR/CAD positions. From a technical perspective, these traders took the opportunity to buy the pair on a bounce from rising trendline support at 1.5300. From a fundamental perspective, this was a great play on oil. Another major correlation we tend to see in the forex markets is the one between crude oil and the Canadian dollar. Despite weakening economic data out of Canada, the surge in oil futures to record highs has supported the Loonie. However, on Friday we saw volatility in crude oil start to ease, and the Canadian dollar has followed suit.

Clearly, there are many tools that can be used to trade profitably in the forex markets. Whether you are using technical analysis or fundamental analysis, it is worth watching correlations such as those between carry trades and equities, or oil and the Canadian dollar, as they can provide additional clues as to where currencies may be going next.

Congratulations to our top three traders and good luck!

Terri Belkas, Currency Analyst, DailyFX.com

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