By Marc Chandler
As the Q2 winds down, it may be useful to review the recent correlations between some of the major currencies and the US S&P 500. The correlation calculations are conducted on the basis of percentage change of the currency and the S&P 500. What follows are the highlights.
Euro: The 30 and 60 day correlation between the euro and the S&P 500 both are about 0.57. The former is flat since out last review on May 18, but the latter is about 0.1 higher. The 30-day rolling correlation hit a peak for the year in late May near 0.71, but rarely has been above 0.60 over since the start of last year. The low for the year was in late Jan near zero. The 60 day rolling correlation also rarely moves above 0.60. It has been trending higher since bottoming in early March just below 0.18. Take-away: the correlations are relatively high and the risk is that the correlation weakens in the period ahead. This would have implications for hedging as well is for the risk-on/risk off axis.
Canadian Dollar: As was the case in the May review, the Canadian dollar is the most correlated to the US S&P 500 among the currencies we examined. The 30 day correlation is 0.85, while the 60 day correlation is near 0.81. Both of these are higher than our May 18 review when they were at 0.76 and 0.70 respectively. The 30-day reading is the upper end of where it has been since last September. Over the past five years, it has been higher than it is now a handful of times, mostly briefly with the exception of the April-Sept period last year. The same general assessment applies to the 60-day correlation. It is at and elevated level compared to its performance over the past five years, during which time it was only above 0.8 in May-Sept last year. Take-away: The correlations are relatively high and the risk is that the correlations weaken in the period ahead.
Australian dollar: In the middle of May, the Australian dollar’s 30-day correlation with the S&P 500 stood near 0.74. Since then it has fallen to just above 0.50. The 60-day correlation has been more stable, slipping from 0.63 to 0.61. The recent loosening of the Australian dollar’s link to the S&P 500 may be a function of the shift in RBA interest rate expectations. The market had been expecting another rate hike in H2, but now the OIS/Libor swap now lower rates being discounted. The shifting rate expectations appears to have blunted the risk-on/risk-off influence recently.
Scandis: The 30-day rolling correlation of the Swedish krona and Norwegian krone to the S&P 500 have weakened since our mid-May review. The SEK correlation has edged down slightly to 0.64 from 0.66, while the NOK’s correlation has slipped to 0.66 from 0.73. On the other hand the 60-day correlations both increased: SEK to 0.64 form 0.54 and Nok to 0.67 from 0.50. SEK has been the weakest of the G10 currencies this month, losing 3.65% against the dollar. The euro is flat, so SEK loss against the dollar has been matched by its loss against the single currency. The euro set new 7 month highs against the SEK today on the back of disappointing Swedish retail sales. The OMX Stockholm Index has declined a little more than 6% this month. This coupled with positioning in the SEK may have provided another force beyond risk-on/risk-off, diluting the correlation between the SEK and the S&P 500.