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Euro/US Dollar Loses Correlation to S&P 500 - Time for Turn Lower

By , Quantitative Strategist
22 April 2009 14:31 GMT

In our most recent US Dollar Weekly Forecast, we discuss reasons why the breakdown in the S&P/EURUSD correlation may herald a shift in the tide. Indeed, it seems as though financial markets reached an unsustainable ‘winning streak’ on the S&P’s sixth-consecutive weekly advance.

Euro/US Dollar and the US S&P 500 Index

Forex_Correlations_2009-04-21_2

The Euro/US Dollar temporarily lost its correlation to the S&P 500—leading many market analysts to claim that forex market dynamics had shifted. The US Dollar had previously moved almost tick-for-tick with the S&P and other key risk barometers, serving its traditional role as a safe-haven currency.  The more recent disconnect suggested that it may have lost its allure as a store of value, but we would argue that paradigms are unlikely to shift so quickly. Instead, we view the breakdown in correlation as a contrarian sign of a market top.

Forex_Correlations_2009-04-21_3

As the S&P 500 hit impressive multi-month highs, the US Dollar and Japanese Yen generally drifted lower. Given broader currency and financial market trends, however, we believe it is only a matter of time before we see a breakdown in risk and sharp rallies in the USD and JPY. Indeed, early-week trade has already seen the EUR/USD break significant lows, and our fundamental and technical forecasts remain bearish.

Forex Correlations Summary

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

Forex_Correlations_2009-04-21_1

Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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22 April 2009 14:31 GMT