Forex Correlations Update: US Dollar and Japanese Yen Less Correlated with S&P 500

Recent forex correlations suggest that the US Dollar and Japanese Yen have lost much of their link with global risk sentiment, and indeed the short-term correlation between the USDJPY and S&P 500 trades near multi-year lows. The implications for price action are somewhat mixed, but we would argue that further flare-ups in financial market tensions would nonetheless lead to pronounced US Dollar and Japanese Yen buying. If the S&P 500 tumbles and the US Dollar fails to rally, however, it would signify that markets have increasingly pulled away from the USD as a safe-haven currency. Such a result would likely prove bearish for the Dollar’s medium to long-term prospects.

Forex Correlations Summary

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

Strongest Forex Correlations

Australian Dollar/US Dollar versus US S&P 500 Index The short-term link between the Australian Dollar/US Dollar currency pair and the US S&P 500 remains near all-time highs. Forex markets continue to treat the US Dollar as a safe-haven currency—bidding it higher in times of financial market duress. At the same time, traders are likely to sell the high-yielding Australian Dollar during the same moments of market tension. The net result is that the AUD/USD moves nearly lock-step with the S&P and similar risk barometers. Recent equity market rallies have clearly benefited the AUD/USD, but any signs of turnaround could easily derail its medium-term rally.

US Dollar/Canadian Dollar and Crude Oil Prices Commodity Bloc currencies likewise remain sensitive to commodity prices themselves, with the correlation between Crude Oil futures and the Canadian Dollar currency pair squarely at record-highs. Given a correlation USDCAD-Crude Oil correlation coefficient of -0.80, our study implies that the variation in Crude prices can “explain” 64 percent of the variation in the Canadian Dollar. Of course, correlation does not imply causality, but we believe it remains important for Canadian Dollar traders to monitor developments in the highly volatile NYMEX Crude Oil contract.

Other Notable Forex Correlations

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 at a virtually non-existent 0.12—down substantially from the peaks 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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