Shifting Drivers in FX

We keep a watchful eye on correlations between various currencies and othermarkets, including equities, commodities, and Treasuries. Although it may feel like some of these inter-market relationships are breaking down, a review of some recent correlations suggest otherwise. Believing it is the most rigorous approach, these correlations are run on percent changes.

EURO: Thus far in 2009, the euro and the S&P 500 are enjoy a 51.1% correlation. However, over the past month, the correlation is 61.8%. Year-to-date, the euro and the CRB index are correlated 32.3% of the time. In the past month it jumps to 61.8%, edging above the S&P 500. While the relationship between the euro and US yields has not been anything noteworthy, in the past month, the euro has been inversely correlated with the price of the US 10 year note (34.7%) and 30-year bond (30.7%)--as long-term US interest rates rise, the euro tends to rise. Year-to-date, the euro and gold do not seem related--correlation of 7.3%, but over the past month the correlation has risen to almost 40%.

YEN: The yen often enjoys a significant correlation with US interest rates. In the year-to-date, the yen and US yields are correlated: 32% of the time with the 5-year yield, 44% with the 30-year yield and 45.9% with the 10-year yield. In the past month, the correlation between the yen and the 5-year yield has slipped to 25.8%, but has risen with the 30-year yield to 51.7% and the 10-year yield to 53.6%. The correlation between the yen and the S&P 500 has also risen. Year-to-date the correlation is -32.6%--when the US stocks go up, the yen has tended to weaken against the dollar. Over the past month the correlation stands at -41.1%.

Ironically, and contrary to conventional wisdom, it is not just the euro that is better correlated with the S&P 500 than the yen, but over the past month, sterling has enjoyed a 67.2% correlation to the US stocks. The Canadian dollar is near 80% and the Australian dollar is at almost 82%. Out of the currencies we looked at, the Brazilian real has the highest correlation at 84.4% over the past month. However, year-to-date, the South African rand has been correlated 79.7% with the S&P 500. The Canadian and Australia's lag slightly at 74.1% and 76.7% respectively.
Shifting Drivers in FX Shifting Drivers in FX Reviewed by magonomics on May 13, 2009 Rating: 5
Powered by Blogger.