What is correlating in FX? - Nomura

Research Team at Nomura, suggests that the top FX correlations have held relatively firm in the last two weeks, with nominal rates differentials (2y and 5y) comfortably dominating the list of top 10 positive relationships.

Key Quotes

“These involve the usual crosses (USDJPY, EURUSD), in addition to new entrants—namely, NOK (crossed with both the EUR and USD) and USDCHF. Interestingly, the correlation between USDJPY and the performance in the Nikkei index has waned considerably (currently only around 30%) since September, after hovering around highs of 80% for the past two months.

On the negative correlations side, changes in the price of gold continue to dominate the list of top 10 strongest relationships (particularly with USD and EUR crossed with JPY and CHF). On the USD side, we view this as symptomatic of the recent rise in the value of the USD on a broad basis, causing a steep decline in the price of gold (around -5%).

On the EUR side, the ECB meeting in September (in which the Governing Council kept all policy rates unchanged and did not more explicitly discuss the possibility of PSPP extensions) provided a catalyst for EUR to begin appreciating on a broad basis, and for lower (more negative) correlations between the currency and the price of gold.

The list of top two-week changes in correlations reflects how GBP crosses have now begun to negatively correlate with the performance of various risk assets (equities and commodities—namely, the Nikkei, DAX and Copper prices). If sustained for a reasonable period of time, this seems to provide more evidence to the point that some fundamental GBP correlations have started to break down in the post-Brexit regime.”