US Dollar and Japanese Yen Lose Forex Correlation to Oil and Dow Jones - What Gives?

The US Dollar has likewise stopped tracking moves in oil prices. Energy prices continue to tumble through recent trade, while the US currency has effectively remained unchanged despite tremendous day-to-day volatility. We believe that such developments remove a key pillar of US Dollar support, and a continuation of such trends would leave the Greenback at risk of declines.

Forex Correlations Summary

Forex correlations against Oil, Gold, and the Dow Jones Industrials Average for the past 20 trading days:

Strongest Forex Correlations

British Pound and the G10 Forex Carry Trade Index The British Pound has shown an increasingly strong link to the G10 Forex Carry trade, and it seems that speculative capital flows have punished the GBP about as much as high-volatility carry trade currencies. According to the Deutsche Bank Carry Trade Basket index, the G10 carry trade has lost about 5 years of previous gains in a matter of months. The ongoing theme of global deleveraging played a very large part in the carry trade unwind, and correlations suggest that the British Pound fell victim to the same dynamic. A continuation leaves the British Pound susceptible to speculative capital flows.

Australian Dollar and Reuters/Jefferies CRB Commodity Index The Australian Dollar has recently renewed its link with global commodity prices—trading virtually lockstep with the popular Reuters/Jefferies CRB Commodity Index. Major export commodities such as iron ore and gold remain a key component of Australian Dollar demand, and sharp drops in raw materials prices tends to lead to similar depreciation in the Australian currency. We envision that such a link will remain strong through the foreseeable future—especially as commodity prices remain extremely volatile.

Weakest Forex Correlations

Japanese Yen and the US Dow Jones Industrials Average The Japanese Yen has effectively stopped tracking moves in global risky asset classes—making its correlation with the Dow Jones Industrials Average virtually insignificant. The chart shown shows that the medium-term correlation remains historically high, but this measure ignores the past week of price action. If recent trends are any indication, the Japanese Yen could lose its safe-haven status in the face of continued global financial deleveraging. Such a shift would prove bearish for the high-flying Japanese currency.

Euro/US Dollar and Crude Oil Futures Prices The highly-touted link between the US Dollar and Crude Oil prices has become virtually insignificant, as the US Dollar has moved largely independently of developments in commodity markets.     Whether or not this is a temporary shift is up for debate, but we would argue that the sharp drop in crude oil costs decreases its real impact on the US Dollar exchange rate. Regardless of the reasons, it seems that crude oil is currently of very little significance to US dollar currency pairs.

Written by David Rodriguez, Quantitative Analyst for DailyFX.com
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