Charles Nenner's Bold Forecast: Key FX Correlations to Equities Ending

 |  Includes: FXA, FXC, FXE, FXY, UUP
by: Cliff Wachtel

A Sneak Preview of a Coming Interview With The Oracle of Amsterdam

We will soon be publishing a major interview with Charles Nenner, one of the most important and unique market researchers today. While hardly a mass market name, the former Goldman Sachs analyst is well known to market insiders.

To find out more about him and what utterly sets him apart from the usual talking heads, stay tuned for the full interview within the coming week. It’s every bit as significant for your trading and portfolio as the below special sneak preview for our Forex readers to help spice up the weekend.

Highest Conviction Trends- Through At Least The End Of 2010

Cycles show that the AUD and CAD will be the strongest currencies for at least the rest of the year. Yet the overall trend for stocks is down for the rest of the year, except for a few short term peaks. Whoa. More on that shortly.

As for the key USD, a participant in over 80% of all forex trade, it will not perform as well as these, though it will outperform the EUR and JPY, which will be the worst of the major currencies during this period. GBP bulls can relax, a bit.

Highest Conviction Trades- Long Term

  • Buy the AUD/JPY, or in some other way sell the yen vs. AUD. For example, those without Forex accounts could simply use ETFs, be long FXA and short FXY.
  • Second choice, worth it for diversification alone, buy the CAD/JPY or similar to the above, buy the FXA and short the FXY.
  • Given the above trends, the implication appears to be that those seeking diversification should consider :
    • For long Forex positions: substituting the USD in Forex long positions (or the UUP) for the AUD and CAD, and
    • For short Forex positions substitute the EUR for the JPY, or the FXE for the FXY, in a major portion of your short Forex positions.

When asked about the fate of the EUR given the ongoing EU debt crisis, Charles (true to form) avoided speculating on how the crisis would play out or drive the EUR, but rather simply noted that per his cycles the near term downside was 1.3350, and seemed quite confident that this strong support level would hold.

This was impressive, because when we spoke about it on March 24th, the EUR was already below that level. Sure enough, it soon recovered within a day and retook the level. Wish I’d have gone long the EUR/USD at that point. As is usually the case, it pays to heed his advice.

He also noted that if the EUR/USD held below 1.3100, that would signal a real crisis in the euro.

FYI, he had called the euro’s high around 1.5100 months beforehand, when there was real discussion of the euro usurping or sharing the USD’s reserve currency status.

Significant Implications- AUD and JPY Correlations To Stocks Weakens

Charles noted that the AUD would “have a life of its own” (distinct from its established correlations to stocks) and continue to show at least relative if not absolute strength over the longer term, despite his forecasted trouble for stocks.

This statement, along with his bearish forecasts for the yen and stocks (in the full article soon to come), set off alarm bells.

For Forex traders, the above forecasts about stocks, the AUD, and JPY are very significant.

For those not familiar with Forex markets, we Forex folk constantly monitor correlations between currencies and various other assets for hints about future movements.

One of the basic correlations over the past years has been that the AUD, as the primary risk currency, rose along with stocks, which are considered the prime barometer of risk appetite. The CAD has also moved more or less with equities.

Conversely, as the primary safe haven currency, the JPY moved opposite stocks.

Per what Nenner’s cycles say, these correlations will be breaking down over the rest of the year, especially into the latter part of 2010.

In contradiction to these established correlations, despite the overall downtrend coming for stocks (after late April and August peaks) for at least the rest of the year, the AUD will continue to be strong, and the JPY will continue to be weak – the exact opposite of what their current correlations to stocks suggest.

DISCLOSURE: No Positions