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Dollar a Factor of Causation, Risk a Source of Correlation

Dollar a Factor of Causation, Risk a Source of Correlation

Talking Points:

• There is an important difference in the measures of correlation versus causation

• Relationships we usually look for between SPX-VIX, Nikkei-USDJPY and USDCAD-Oil are more correlation

• The Dollar's pricing role is increasingly exposing a causation that investors in all assets should watch

Want to develop a more in-depth knowledge on the market and strategies? Check out the DailyFX Trading Guides we have produced on a range of topics.

The relationship between the S&P 500 and VIX is a correlation founded on sentiment. While there is some of that third-party connection between the USDollar and the S&P 500, commodities and fiat assets; there is also a strong influence of causation. Correlations are founded in a unique fundamental connection that rises and falls with the intensity of that theme. We look at this regularly when comparing the many different 'risk'-sensitive assets: S&P 500, world equities, commodities, high-yield, yen crosses, etc. Causation in contrast arises when one tradable instrument actually exacts influence on another without having to connect through a third element. We look at the difference between causation and correlation while discussing the importance of identifying both to better trade all markets in today's Strategy Video.

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