S&P 500 Declines Could Force US Dollar Rallies on Forex Correlations
The link between financial market risk sentiment and foreign currencies remains as strong as ever, and recent price action emphasizes that the US Dollar and Japanese Yen stand to gain significantly on further turmoil for the S&P and broader markets. Tensions run high across the financial world amidst considerable geopolitical risk out of the Middle East, Japan, and flare-ups in sovereign debt crises in the euro zone. Any one of these factors could realistically force noteworthy deterioration in the highly risk-sensitive S&P 500 and force considerable Euro, Australian Dollar, and Canadian Dollar declines against the safe-haven US Dollar and Japanese Yen currencies.
Forex Correlations Summary
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Australian Dollar and US S&P 500
The Australian Dollar and US S&P 500 Index continue to move on a near tick-for-tick basis. The high-yielding Aussie dollar has attracted significant speculative capital on strong financial market risk appetite, but any sudden shifts in risk sentiment just as easily force noteworthy declines. We saw this quite clearly when the AUDUSD tumbled on dramatic Japanese Nikkei 225 sell-offs. Financial markets remain tense on various sources of geopolitical risk around the world. Traders should keep an eye on financial market risk sentiment and the previously high-flying Australian Dollar.
Euro/US Dollar and US S&P 500
The Euro’s link to the S&P 500 has likewise strengthened as leveraged bets increasingly move in tandem across financial markets. Recent CFTC Commitment of Traders data shows that net Non-Commercial EURUSD positioning remains near its most net-long since 2007, and such one-sided positioning warns that a rush for the exits could spark dramatic EUR losses. It will be very important to watch the S&P’s trajectory and broader moves in financial risk sentiment to gauge the likelihood of a more sustained EURUSD correction.
US Dollar/Canadian Dollar and US S&P 500
The previously high-flying Canadian Dollar remains very closely correlated to the US S&P 500 and broader risk sentiment—warning that a turn lower in stocks could force further losses (USDCAD rallies) through upcoming trade. In fact, the S&P-USDCAD correlation is currently far stronger than the USDCAD link to Crude Oil prices. The slightly unusual shift emphasizes that the Canadian Dollar could fall sharply on a turn lower in stocks. Of course, further S&P gains could just as easily put pressure on the safe-haven US Dollar and drive continued USDCAD losses.
Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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