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Who is right? SiMSCI/HSI (stockmarket) or AUDJPY (Forex)?

It appears there is a big divergence between the usually highly correlated HSI, SiMSCI and AUDJPY.  There are 3 possibilities:

  1. Their positive correlation has broken down and is no longer valid.
  2. Both indices are too high and should correct soon (implying AUDJPY is correct).
  3. AUDJPY is too low and should catch up to the indices soon (implying indices are smarter).

Please participate in this simple poll on Google Plus to indicate your choice.

 

Positive correlation between AUDJPY and Asian stock indices

Includes EEM, SiMSCI, HSI, China A50 and Nikkei 225. I have discussed these previously here and here.

Overlay of EEM, HSI, SiMSCI and China A50

Overlay of EEM, HSI, SiMSCI and China A50 (mid-2015 to end-April 2016 | Source: Investing.com

The positive correlation could be due to 2 dynamics:

  1. AUD tends to do well when Asian economies like China are doing well (think of Australian exports of iron ore, other commodities)
  2. JPY tended to strengthen due to repatriation when its stock market i.e. Nikkei 225 is not doing well (which also tracks Asian indices).

 

SiMSCI and AUDJPY diverged, SiMSCI much stronger

SG30 is a CFD contract of SiMSCI from Oanda.

AUDJPY, SiMSCI overlay shows divergence

AUDJPY, SiMSCI overlay shows divergence

 

HSI and AUDJPY diverged, HSI much stronger

HK33 is a CFD contract of HSI from Oanda.

HSI has a tendency to ‘run away’. We saw that previously in the middle of 2015 and then the earlier part of 2016. The first time HSI got carried away was over the Shanghai – Hong Kong Connect. The second time HSI got carried away was over the Shenzhen – Hong Kong Connect. See my discussion on these two divergences here.

I want to emphasise that HSI and AUDJPY converged after both divergences.

HSI is now diverged again from AUDJPY. Is HSI correct this time or is the forex market represented by AUDJPY still the more sophisticated and smarter one? We have to see. I place my bet on AUDJPY.

AUDJPY, HK33 overlay shows divergence

AUDJPY, HK33 overlay shows divergence

Note: Some users may notice that I do not use the same charts consistently, that I use data from different contracts such as CFDs from time to time. These contracts have different names depending on the source and which platform I use (usually switching between Investing.com and Tradingview.com) although their underlying is the same. For the purpose of creating an overlay, to make simple observations, they are sufficient.

Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’. Operates multiple strategies.

“Dear reader, I do not have a financial license to give advice. I do not know you the reader. Your financial objective and risk tolerance may be different from mine. I am not responsible for any consequence of your action.

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