Stocks Down, USDCAD Up

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Stocks and VIX were both up, which is bearish. You can play this through FX if you’d like.

by Brent Donnelly

February 3, 2023

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Current Views

Buy USDCAD 1.3390/95

Stop loss 1.3279

Take profit 1.3644

Short NZDCHF at 0.5950

Stop loss 0.6055

Take profit 0.5827

Long 07FEB EURGBP call

spread 0.8870/0.8920 risking

22 GBP bps to make 50

Spot ref. 0.8850

February 3, 2023

Stocks down, USDCAD up

There was quite an unusual setup in equities yesterday as VIX went up, call volumes were extremely high, and stocks were up more than 1% on the same day. Generally, VIX and stocks move in opposite directions. There have been 8280 trading days since January 1990 and only 909 of them have been VIX UP, SPX UP. 877 have been VIX DOWN, SPX DOWN and the other 6494 saw VIX and SPX go opposite directions. That is, 78.4% of all days, VIX and SPX move in opposite directions.

Here is the forward performance of SPX when VIX is up and SPX is up more than 1%, as was the case yesterday.

Yesterday’s combination is bearish. Obviously today’s NFP adds fuel to the fire as we are quickly going to start to wonder whether the Fed took its foot off the brake too early. Yesterday’s price action also had a weird feel overall, as AUDUSD, gold, and silver all dumped despite higher SPX. Look for lower stocks next week.

If you are looking to play this via FX, here are the correlations over the past 100 days:

If you think stocks go down next week, which I do as it seems like we reached peak euphoria/short covering/FOMO yesterday, long USDCAD makes a lot of sense here.

It was destroyed at month end, and now oil is trading horribly again and commodities overall are giving back much of their China reopening gains.

Here is USDCAD vs. oil.

USDCAD vs. NYMEX crude oil (inverted)

I don’t want to chase it up here given it’s just ripped post-payrolls, so I’m going to leave an order to buy 1.3390/95 with a stop at 1.3279. Target 1.3644.

Trades updates

The BOE is unambiguously dovish so hopefully that pushes EURGBP up, up and away as my call spread expires Tuesday. Lower stocks should keep NZDCHF heavy, though that correlation hasn’t been tremendously strong.