The currency markets have been acting like a tale of two cities of late. Meaning that risk appetite has increased in some currency pairs providing meaningful moves while other pairs have seen risk aversion applied and enjoyed far less moves. One could argue that we are seeing a similar situation in equities as well.
In foreign exchange the increase of risk appetite has the Yen on the move, backward. Whether it is versus the Euro, British Pound or Australian Dollar the Yen backpedaled in March. Has the ‘carry trade’ returned? It may be a bit premature to state that it has but with Japan’s ultra low interest rates this has been a nice reminder of how the Yen will trade when global interest rates head higher. In equities the general indices are posting sizable gains with indices such as the German Dax posting a 9% gain in March.
Those are nice headlines but as mentioned trading has not been all that easy as risk-taking has not been universally widespread. One currency in particular that had a down month and has only recently showed some renewed vigor is EURUSD. Why is this meaningful? Because EURUSD is the most active currency pair traded in the interbank market as the BIS statistics show and is the most active currency pair traded by individual traders as Currensee shows.
As of this writing Currensee showed that there are 5x as many positions in EURUSD as there are in EURJPY. If you were to also consider volume and not just net positions then that tilt would be probably be even larger in EURUSD. Back to equities, we know that equities have been moving higher but its also well known that the volume in the equity markets has been rather low. In March there were only 4 days where daily S&P 500 volume was over 5b shares traded per day. By comparison in March of 2009 there was Zero days where volume was less than 5b shares traded per day.
Traditionally EURUSD has been the best measure of global risk-taking since the US has an equity surplus. Those light volumes in equities are matching the price action in EURUSD right now and it appears as if the US investors (larger mutual fund and other institutions) are not ready to invest internationally for the added equity return. Interest rate spreads certainly matter but when the DAX is up 9% in a month you might expect a bit more out of EURUSD.
Thus is there opportunity ahead in EURUSD? Taking a close look at the volumes in the major equity indices may provide some clues. Still one does not always need to trade or invest in the most active pairs to find opportunities. The Yen has provided a nice reminder that there are plenty of opportunities to be discovered in the forex market outside of EURUSD.
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