Risk aversions / Safe Havens

Viren here.

Since Shai, has announced that we will look at trading and analyzing everything else besides our dear Nifty, I thought that I'll put together a post to give a broader perspective on how in the giant scheme of things- the role played by 'hot money' in equities is influenced by other markets like the commodities and forex markets which determine money flow and risk appetite.


Let's look at what the ES is doing currently :



Good bounce off 1084. Shai's levels have always been accurate. No arguments.
It will be interesting to see if it remains here at 1096 or moves to 1110 today.

Most of you would have read that copper is a leading indicator to equities.



Till that beautiful uptrend is maintained, there is no threat to the equity index chart anywhere on the planet ! Hugh...maybe not with the likes of the Karachi or Dubai stock exchanges. :) . But you know what I mean.

Have a look at another chart.



The chart is that of the AUD/JPY or the Australian dollar/ Japanese yen. Most of you would be knowing of the Euro as a risk currency which appreciates in times of optimism or risk appetite.The Australian Dollar (AUD), the New Zealand Dollar (BNZ), the Canadian Dollar (CAD) and British Pound (GBP) are categorized together.This is mostly because their underlying economies are based on growth dependent exports.Note that these tend to move in the same direction as other risk assets like stocks and commodities, which also tend to rise in price during periods of growth or anticipated growth, and fall in times of fear.

On the other side is the Japanese yen which is primarily a safe haven currency.Along with the Japanese yen are the likes of the US Dollar (USD) and Swiss Franc (CHF).
These labels of ‘risk currency’ or ‘safety currency’ do not reflect on actual quality of the currency as a reliable store of value. Rather they are just labels describing how these behave in times of optimism, aka risk appetite, or pessimism, aka risk aversion.

The AUD is the ultimate risk currency i.e.it tends to rise the most in times of optimism, and fall the most in periods of risk aversion. The JPY is the ultimate safe-haven currency, and behaves the opposite way.

With AUD most vulnerable to move the most during bouts of risk aversion while the JPY is primary safe haven currency, the AUD/JPY will fall most aggressively should equities weaken or rise aggressively should equities rise.

Thus if the AUD/JPY trend is up-risk appetite is on and the trend in stocks and commodities should be higher. If it’s down, the opposite happens.



The above 3 year daily chart testifies. Note the other pair of Eur/ Usd broke Oct 08 lows recently, because both the Euro and the Dollar are susceptible to "news flows" as in the recent greek crisis.

On another note, after much coaxing, I've managed to convince Shai to launch 'Vtrender 2'.I feel that serious eduction in the markets is missing and people invest in the markets as they invest in a lottery.People will put 50,000 in a fixed deposit to get 3000/- at the end of the year after a lot of study, but will not follow 2 bits of advise to make upto 3000/- every day from 50,000/- spent on 2 good Nifty lots.

'Vtrender2' will be invitation only with a small subscription- to the serious traders who want to learn these vast financial markets with us and earn a few thousand along the way.