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Currency Correlation with Stock Market Rises Sharply - Cross Asset Correlation

Currency Correlation with Stock Market Rises Sharply - Cross Asset Correlation

2020-05-19 11:00:00
Justin McQueen, Analyst
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GBP/USD, AUD/USD Analysis & News

  • Risk Rally Prompts US Dollar Pullback
  • Brexit Risks Remain for GBP
  • Australian-China Trade Tensions on the Rise

A trifecta of notable news catalysts has prompted a sizeable risk rally across equity markets, in which US stocks posted its largest daily gain since March. Firstly, Fed Chair Powell had reiterated that the central bank has more tools at its disposal. Following this had been the increased hopes of a potential vaccine after successful trial results from Moderna, while the most pertinent developments had been the proposal by Germany and France of an EU recovery fund. In turn, major G10 currencies soared at the expense of the US Dollar.

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Since the coronavirus crash, G10 currencies have shown a greater correlation to risk assets (S&P 500) and by extension has traded in unison against the US Dollar with yesterday providing a reminder of this. That said, with the macro backdrop remaining highly uncertain we suspect this will remain the case for the majority of currencies with idiosyncratic factors playing less of a role in dictating price action.

Brexit Risks Gains Traction

However, there are a few exceptions, most notably the GBP, which as we highlighted last week will face Brexit uncertainty in the run-up to the transition period extension deadline (June 30th). As such, the Pound is likely to continue lagging its counterparts.

GBP/USD BULLISH
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 11% 11% 11%
Weekly 4% 36% 16%
What does it mean for price action?
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Trade Tensions Down Under

Elsewhere, rising trade tensions between Australia and China may create hurdles for further AUD upside. Overnight, China imposed a near 80% tariff (anti-dumping duty of 73.6% and anti-subsidy duty of 6.9%) on Australia’s barley sector and will look to potentially place more tariffs on Australia’s wine, seafood, fruit and dairy products.

AUD/USD BULLISH
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 8% 10% 9%
Weekly 1% 21% 13%
What does it mean for price action?
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Figure 1. Rising FX Correlation With Risk Assets

Currency Correlation with Stock Market Rises Sharply - Cross Asset Correlation

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

Currency Correlation with Stock Market Rises Sharply - Cross Asset CorrelationCurrency Correlation with Stock Market Rises Sharply - Cross Asset CorrelationCurrency Correlation with Stock Market Rises Sharply - 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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