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US Dollar Out of Favour, Global Risk Rally in Full Swing - Cross Asset Correlation

US Dollar Out of Favour, Global Risk Rally in Full Swing - Cross Asset Correlation

2020-06-03 09:30:00
Justin McQueen, Analyst
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US Dollar Analysis & News

  • Global Risk Rally Persists as US Dollar Slides
  • US Dollar vs S&P 500 Negative Correlation at Multi-Year Highs
  • US Dollar Out of Favour as ROW Catches Up

Global Risk Rally Persists as US Dollar Slides

The risk rally in recent weeks has been relentless despite the rising uncertainties over US/China tensions, US riots, and the weak economic backdrop. However, liquidity is plentiful with major central banks and governments providing unprecedented stimulus to kickstart economic growth. Alongside this, among the key factors that have helped push risk assets higher has been the reversal in the US Dollar. Typically seen as a safe-haven, the meaningful pullback in the greenback has coincided with an extension in the bullish momentum seen across equities, most notably the tech-focused Nasdaq, which is within a whisker of its all-time high.

US Dollar vs S&P 500 Negative Correlation at Multi-Year Highs

US Dollar Out of Favour, Global Risk Rally in Full Swing - Cross Asset Correlation

Source: Refinitiv. 30D Correlation Log, USD vs S&P 500.

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US Dollar Out of Favour as ROW Catches Up

While US equities and in particular the Nasdaq 100 has seen a “V” shaped recovery, when looking at the ratio between the S&P 500 and the high-beta EEM (Emerging Market ETF), the pullback in favour of EEM maintains the view that outflows could persist in the greenback. Therefore, we would look for a bottom in the ratio to be reached before support is seen in the USD.

US Dollar Suffers as Investors Demand Alternative Assets

US Dollar Out of Favour, Global Risk Rally in Full Swing - Cross Asset Correlation

Source: Refinitiv. S&P 500/EEM Ratio vs US Dollar

Cross-Asset CorrelationMatrix(1 Week, 1 Month & 3 Month Timeframe)

US Dollar Out of Favour, Global Risk Rally in Full Swing - Cross Asset CorrelationUS Dollar Out of Favour, Global Risk Rally in Full Swing - Cross Asset CorrelationUS Dollar Out of Favour, Global Risk Rally in Full Swing - Cross Asset Correlation

Source: Refinitiv, DailyFX. The Topix is used a proxy for the Nikkei 225.

--- Written by Justin McQueen, Market Analyst

Follow Justin on Twitter @JMcQueenFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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