Forex Correlations Update: Japanese Yen Little Correlated With S&P 500

The USD now holds the dubious honor of being the lowest-yielding major world currency; LIBOR rates now show borrowing US Dollars is actually less expensive than borrowing Yen. This was a situation unthinkable just several years ago, and goes a long way in explaining the clear shift in USDJPY correlations. All else remaining equal, it seems that continued S&P 500 gains will lead to Dollar losses. Of course, this likewise suggests that a sharp market pullback could actually lead to USD gains versus the Japanese Yen.

Forex Correlations Summary
Forex correlations against Oil, Gold, and the Dow Jones Industrials Average for the past 30 calendar days:

Strongest Forex Correlation

Australian Dollar/US Dollar versus Reuters CRB Commodity Index The US Dollar has taken the dubious honor of the lowest-yielding major world currency, and we have unsurprisingly seen it fall during times of robust financial risk appetite. Indeed, the Greenback has virtually traded tick-for-tick with stocks-emphasized by its near-record negative correlation with the S&P 500. Given that the US Fed is likely to leave rates unchanged for the foreseeable future, the Greenback is likely to continue to take its cues from broader risk sentiment. This means that currency traders should likewise look for clues among stock markets to discern likely direction in the Dollar.

Weakest Forex Correlation

US Dollar/Japanese Yen and the US S&P 500 Index One of the more surprising shifts in recent market dynamics has been the Japanese Yen’s apparent disconnect from moves in broader risky asset classes. In fact, the 20-day correlation coefficient between the USDJPY and S&P 500 is actually negative—something unthinkable through the market distress seen through late 2008 and early 2009. The breakdown in correlation suggests that the Japanese Yen may increasingly move independently of risk sentiment. Yet we strongly suspect that a sharp return to market risk aversion would strengthen the link between the perennially low-yielding JPY and broader risky asset classes.

Written by David Rodriguez, Quantitative Strategist for DailyFX.com

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