Currency Market Misery Is Algo Traders' Dream as Dollar FaltersBy
Greenback uptrend loses steam even with robust economic data
Rising correlation between bonds and FX drive algo signals
Life may be a little tough if you’re a dollar bull hoping today’s the day the trend is going to resume. If you’re an algorithmic trader, you might just be in heaven.
Underneath the faltering dollar rally is a strengthening correlation between the currency and the differences in yields of U.S. Treasuries and the sovereign debt of other nations. The relationship between the asset classes makes a popular algorithmic trading strategy, where dollars may be bought or sold, minute by minute, depending whether the rate differential is widening or shrinking.
The positive relationship has grown stronger this month. The 90-day correlation between that yield gap and the dollar-yen exchange rate rose to 0.6, the highest since October 2014. At a time when even robust economic data fails to lift the dollar, investors may want to pay closer attention to this bonds-currencies dynamic.