Many medium-term investors are interested in the relationship between currencies and the equity market. There is also a sense among many observers that the market is moving in waves of risk-on and risk-off. To help shed light on the issue, we looked at the correlation between several currencies and the US S&P 500. From a methodological point of view, we are looking at the correlations on the level of percent change.
Euro: Over the past 60 days, the euro's correlation with the S&P 500 is about 0.47. This represents a significant recovery from the low of below 0.2 seen in early March. The correlation had been trending lower from early last Nov. (near 0.68) to that early March low and since has been trending higher.
Over the past 30 days, the euro's correlation with the S&P 500 is about 0.58, which is consistent with the trend rise in the 60-day reading. The low correlation of the year was recorded in mid-Jan. near 0.
Canadian and Australian dollars: Over the past 60 days, the Canadian dollar is about 0.70 correlated to the S&P 500. It was the strongest correlation of the major and several emerging market currencies we looked at. The low point of the year was reached in early March, near 0.48. Over the past 30 days, CAD's correlation is near 0.76. The Australian dollar's correlation is the same over this time period, but over the 60-day period, the Australian's correlation is somewhat lower than CAD (at 0.64).
Japanese yen: The yen's 60-day rolling correlation with the S&P 500 has been trending low since the middle of last December. It has fallen from about 0.1 to -0.3, near where it has hovered around since mid-March. The 30-day correlation is -0.28, as one might expect given that the 60-day correlation has been little changed over the past month.
Norwegian krone: Not typically a currency one might intuitively look for correlations with the S&P 500; we included it as a bit of a lark, but over the past 30 days its correlation rivals the Canadian and Australian dollars. The correlation is near 0.73, but over the past 60 days it is just below 50.
Key Takeaways: Correlations between currencies and the S&P 500 are not stable. Correlations between most of the major currencies have increased in the past 30 days. Based on recent historical performance, the correlations may increase further for the Australian and Canadian dollars and the euro. The inverse correlation between the yen and the S&P 500 appears more likely to be reduced than strengthened. The high correlation that the Norwegian krone enjoys seems unlikely to be sustained.
This work that shows the variability of correlations warns against simply bucketing currencies into risk-on and risk-off baskets, using the S&P 500 as the risk metric. The Canadian dollar, which often appears particularly sensitive to S&P movement, has seen its 60-day rolling correlation move between 0.90 and 0.47 between August 2010 and March 2011. It is the difference between moving in the same magnitude and direction nine of 10 days and not quite five days.
Disclosure: No positions