Hey SD, I just checked out the video. It was pretty much what I thought it was but I wanted to make sure first.
He's right about watching the AJ pair but you could actually watch any risk pair and get the same results. You could watch AU by itself or GU or NU for example and still determine what the market is doing overall.
It does have to do with interest earned for sure. When the market is happy, they sell dollars and buy something else.
The easiest way to think of it is on a personal basis. If things are going great with your job and you're making good money and you fell good about things in general, you're gonna go out and spend money on some luxury items. This could be anything from meals out to purchases of higher cost items like homes and automobiles.
So in the case of a feel-good situation, you're trading dollars for something else that you consider more valuable to you than holding onto those dollars. That's what the market does when it's feeling good....it trades the dollars for something else that it feels gives it more value, as in the case of the Aussie dollar which pays good interest to hold long positions. Or in the case of stocks, they may buy dividend paying stocks or even stocks that they feel will just continue to move up in a good environment. That's why financials take a beating during market downtrends. Most financials depend on people going to the bank, taking out loans, etc. That's how the bank makes money. In a bad economy though, people don't take out loans and the banks suffer from it. So when the selling begins, the financials usually get nailed first.
But if things aren't good and you feel fearful, you don't go out and spend money on on luxury items. You hold that cash tight and you might even sell some stuff to hoard more cash. Same with the market. Regardless of how good interest rates on those other currency pairs may be, the market will unload those currencies in a hurry and pile right back into the good ole US dollar if the S&P starts taking a dive.