Browse By

Is it time for SiMSCI and HSI to converge with AUDJPY?

Positive correlation that diverged far too long

AUDJPY, SiMSCI and HSI demonstrated very high levels of positive correlation in the past. This is visible in charts going back to 2008.

Since the beginning of 2017 however, they have diverged so far as to question whether their positive correlation is still valid. This is important. If their correlations are still valid, what does AUDJPY’s recent trend portend for traders in these two Asian indices? Is it time to converge?

Back in July 2017, I observed that HSI and SiMSCI were diverging from AUDJPY. This is what I wrote a

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 Their positive correlation has broken down and is no longer valid.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).

This is weekly chart of AUDJPY overlaid with HSI (represented by HK33 by Oanda). We can see strong positive correlation from 2008 to 2015. There were two divergence previously caused by speculation during the SHHK Connect episode and the later SZHK Connect episode. Eventually AUDJPY-HSI re-connected after both episodes.

The current divergence is the widest and longest – long enough for me to question whether their correlation is still valid. So who is right?

If HSI is right, AUDJPY will be pulled higher. If AUDJPY is correct, HSI will eventually ‘come down to Earth’.

HSI - AUDJPY divergence in weekly chart 2008 - present

HSI – AUDJPY divergence in weekly chart 2008 – present

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.

This is weekly chart of AUDJPY overlaid with SiMSCI (represented by SG30 by Oanda). SiMSCI looks less ‘carried away’ like HSI but nevertheless shows the same divergence. A previous divergence was eventually closed.

SiMSCI to AUDJPY divergence in weekly chart 2008 to present

SiMSCI to AUDJPY divergence in weekly chart 2008 to present

 

AUDJPY is falling

What is AUDJPY’s trend? On 25 January 2018, I spotted 3 out of 5 elements of a high probability reversal pattern. This was an accurate observation. AUDJPY was trading around 88.10 at that time. It is doing around 85.80 at this moment.

With a big bearish expansion yesterday below January level, AUDJPY might pull back but should have more room to go lower. If AUDJPY to HSI and SiMSCI correlation are still valid, we are likely to see them converge at some point in the future. Any bets in which direction?

AUDJPY daily chart March 2017 - 06 Feb 2018

AUDJPY daily chart March 2017 – 06 Feb 2018

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

“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.

3Shares
Loading Facebook Comments ...

Leave a Reply