US Dollar Loses Correlation With Dow Jones, Forex Market Continues to Track Oil

Forex correlations have taken an interesting turn through recent trading, as the safe-haven US dollar has seemingly lost its link to the US Dow Jones Industrials Average—potentially removing a key pillar of support for the US currency. Dismal risk sentiment previously led to a sharp unwind of USD-short positions, and the Greenback benefited from sharp declines in global risky asset classes. Yet more recent price action left the US Dollar significantly lower despite losses in the DJIA and other risk barometers. All else remaining equal, such a shift in correlations bodes poorly for the USD against similarly risk-sensitive currencies. That being said, the Japanese Yen continues to trade almost tick-for-tick with the Dow Jones and other major equity indices.

Forex Correlations Summary

Forex correlations against Oil, Gold, and the Dow Jones Industrials Average for the past 20 trading days:

Strongest Forex Correlations

US Dollar/Japanese Yen and the US Dow Jones Industrials Average The US Dollar has recently lost its correlation with the Dow Jones, but the Japanese Yen’s link to risk sentiment remains rock-solid. The extremely low-yielding currency has almost invariably rallied in the face of stock market losses, and a persistently sky-high rolling correlation between the JPY and DJIA suggests that this is unlikely to change through the foreseeable future. In fact, some traders report using the Japanese Yen as a proxy for trading movements in the Dow—especially against similarly high-yielding carry trade currencies.
British Pound and the G10 Forex Carry Trade Index The British Pound has shown an increasingly strong link to the G10 Forex Carry trade, and it seems that speculative capital flows have punished the GBP about as much as high-volatility carry trade currencies. According to the Deutsche Bank Carry Trade Basket index, the G10 carry trade has lost about 5 years of previous gains in a matter of months. The ongoing theme of global deleveraging played a very large part in the carry trade unwind, and correlations suggest that the British Pound fell victim to the same dynamic. A continuation leaves the British Pound susceptible to speculative capital flows.
Australian Dollar and Reuters/Jefferies CRB Commodity Index The Australian Dollar has recently renewed its link with global commodity prices—trading virtually lockstep with the popular Reuters/Jefferies CRB Commodity Index. Major export commodities such as iron ore and gold remain a key component of Australian Dollar demand, and sharp drops in raw materials prices tends to lead to similar depreciation in the Australian currency. We envision that such a link will remain strong through the foreseeable future—especially as commodity prices remain extremely volatile.

Weakest Forex Correlations

US Dollar and the US Dow Jones Industrials Average The US Dollar has very recently stopped tracking moves in global risky asset classes—making its correlation with the Dow Jones Industrials Average virtually insignificant. The chart shown shows that the medium-term correlation remains historically high, but this measure ignores the past week of price action. If recent trends are any indication, the US Dollar could lose its safe-haven status in the face of continued global financial deleveraging. Such a shift would prove quite bearish for the previously high-flying US currency.

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