AUD, NZD, JPY, USD Correlation
What is the correlation between equities, as well as the Aussie, the Kiwi, the US dollar, as well as the yen?
Now, the biggest correlation between the equity markets, whether that is your Asia-Pac, your European or your US equity markets, in general, equity markets are normally a very good gauge of the market’s overall risk tone.
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So whenever we have a very strong risk-off tone, you normally tend to see lots of downside in the equity markets, and whenever we have a very strong risk-on tone, we normally see lots of appreciation in the equity space, so green across the board.
Now what normally happens in a risk-off environment, so basically an environment where we would expect equity markets to be red across the board and tanking with momentum for the downside, what normally happens in that risk-off environment, we are expecting your high-beta, commodity-based currencies now that is your Australian dollar, your Kiwi dollar, as well as your Canadian dollar.
We expect those three currencies to be pressured in an overall risk-off environment, and we expect the more traditional safe havens, like your Japanese yen as well as your Swiss franc to remain supported across the board as they are safe havens which tend to appreciate in a strong risk-off tone.
Now, whenever we have a very strong risk-on tone, so that would mean equity markets will be trading green across the board, that’ll normally see the vice versa happen, so then we will expect strength for your high-beta, commodity-based currencies, like your Aussie, your CAD and your Kiwi, and we’d expect weakness across the board for your traditional safe havens like the Japanese yen and the Swiss franc.
The US dollar is normally also seen as a safe haven, but that is mostly in times of very great market uncertainty so like the times we’ve had over the last couple of weeks, looking at the dollar index, you’ll remember we had a very big run to the upside two weeks back, now that massive move to the upside, let me just quickly get it on the screen.
That massive move to the upside that we saw two weeks back was basically a lot of US dollar demand as a safe haven as most investors were trying to liquidate some of their more riskier assets, like equities and commodities, and basically just trying to hoard as much cash as they can in that economic uncertainty.
So when we have massive panic, that is normally also a time when we can consider some short-term appreciation in terms of the US dollar. So as just a normal running of the ML, we don’t normally see as much reaction from risk-on, risk-off in the dollar compared to something like the safe havens and the commodity-based currencies, but in times like we are now, it can have a much bigger impact on the US dollar.
Now also, not only considering equities, looking at equities, that is normally a first gauge way we look at for risk-on and risk-off tones, but we also need to consider other asset classes like commodities, and normally when we have a strong risk-off environment with equities down.
We also expect other asset classes or other commodities like WTI Crude, silver, as well as copper prices to also be down, and you can also consider your broadest CRB index also expecting downside pressure in a risk-off environment, and vice versa when we have a strong risk-on environment, you’re expecting currencies or commodities rather like your copper prices, oil prices, and the CRB index to move up in the session.
So that is the basic correlation that we look at in terms of equities and how it relates back to the commodity-based currencies, as well as the traditional safe haven currencies.