By now, everyone has noticed that the inverse relationship between the stock market and the U.S. dollar has broken. For December, the U.S. dollar index is up a healthy 4.7% while the S&P 500 is up 2.1%. I created two charts to demonstrate the dramatic nature of the change relative to trading before December.
The first chart shows a rolling 10-day correlation between SPY, the S&P 500 ETF, and various currency ETFs (an index is provided below). The second chart shows a 30-day rolling correlation. Data are through Monday’s trading.
Correlation ranges from -1 to 1 and essentially describes the degree of relationship between two (or more) variables: a correlation of 1 means that two variables always move in the same direction by the same factor; a correlation of -1 means that two variables move in opposite directions by the same factor; a correlation of 0 signifies the absence of any relationship. I chose the currency ETFs because the data is readily available, and they show open and close based on U.S. trading hours. All the currency ETFs are measured against the U.S. dollar: the higher the price of the ETF, the stronger the currency versus the U.S. dollar. I broke out the analysis on a currency-by-currency basis to examine whether any currency was exerting particular influence on the currency-stock market correlation. (Note that the euro constitutes the majority of the index at 57.6%, and the Australian dollar is NOT in the index).
The charts below show how the correlation between the currencies and the SPY have converged: the range of correlations this month have contracted. In particular the correlations using the pound (FXB) and the yen (FXY) migrated into the range formed by the other currencies. The rolling 30-day chart shows this convergence most dramatically. December marks the
