US Dollar, Japanese Yen Remain Closely Correlated to S&P 500

Written by David Rodriguez, Quantitative Strategist

Forex markets remain heavily correlated to financial market risk sentiment, while key currencies remain comparatively indifferent to short-term interest rate developments.

US Dollar, Japanese Yen Remain Closely Correlated to S&P 500

Forex markets remain heavily correlated to financial market risk sentiment, while key currencies remain comparatively indifferent to short-term interest rate developments. In past years, currencies such as the US Dollar, Euro, and British Pound responded quite sharply to any and all changes in interest rate developments. Yet more recent market environments have clearly changed that dynamic, and currencies such as the US Dollar and Japanese Yen most often move sharply in response to big changes in key risk barometers.

Other Notable Forex Correlations

Euro/US Dollar and Price of Gold

One of the more surprising shifts through recent trade has been the apparent disconnect between the Euro/US Dollar and Gold prices. The two have historically moved in the same direction as investors often hedge against US Dollar weakness by buying gold. More recently we’ve seen the EURUSD set fresh peaks and Gold prices edge near record-highs. Yet the precious commodity has failed to match the Euro’s strength, and in fact has recently lost ground against the single currency. Priced in Euro terms, gold prices are actually near 15% off of their 2009 peaks.

Euro/US Dollar and Crude Oil Prices

Broader market trends have likewise linked commodity prices to the US S&P 500 and US Dollar—leaving the short-term correlation between the NYMEX contract and EUR/USD near record-highs. The fact that Crude prices have remained within a fairly tight range despite US Dollar weakness is perhaps surprising. Yet we suspect that future direction in energy prices will track USD price moves.

Euro/US Dollar versus US S&P 500 Index

The short-term link between the Euro/US Dollar currency pair and the US S&P 500 remains near all-time highs. Forex markets continue to treat the US Dollar as a safe-haven currency—bidding it higher in times of financial market duress. At the same time, traders are likely to sell the Euro during the same moments of market tension. The net result is that the EUR/USD moves nearly lock-step with the S&P and similar risk barometers. Recent equity market rallies have clearly benefited the EUR/USD, but any signs of turnaround could easily derail its medium-term rally.