Research Team at Nomura, suggests that significant changes to FX correlations have taken place in the last two weeks.
Key Quotes
“With uncertainties around key events now out of the way (Fed and BOJ meetings), and with the recent bear-steepening moves in DM curves having proven to be a temporary hiccup in the wake of some notable dip-buying, previously strong GBP correlations (with interest rates) have firmly taken a backseat. For instance, the correlation between EURGBP and nominal rates differentials collapsed from hovering in the high 80%’s to barely around 30% on average currently.
To be sure, heightened volatility conditions over the past two weeks have systematically lowered top FX correlations across the board. Despite this, changes in the composition are still worth highlighting. Strong JPY correlations returned this week, featuring in the list of top 10 positive correlations (e.g. USDJPY with rates differentials (2y, 5y and 10y) and EURJPY with the performance of the Nikkei index). We think this latter correlation will prove instrumental in assessing the efficacy of the new policy regime in Japan.
Another notable relationship is the positive correlation between various AUD crosses (against both the USD and EUR) with various risk proxies (commodity prices (silver), stock market returns (SP500), and options-implied volatility metrics (VIX and own-ATM vol.))
As expected, GBP correlations now feature in the list of top two-week (negative) changes in correlations. Meanwhile, AUDUSD movements continue to grow more (negatively) anchored to the shape of the EUR and USD rates curves (2s10s). On the flip side, EURUSD correlations with nominal rates differentials (2y, 5y and 10y) have returned in full force, after having collapsed to a virtually zero correlation by mid-August following the Brexit vote.”
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