Panic brings short term relationships closer

THE CORRELATIONS CORNER (week-ending 08.12.11)

Updated Aug 12, 2011 6:30:00 PM By Daniel Hwang, Senior Currency Strategist

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Panic brings short term relationships closer

SHORT TERM CORRELATIONS (14-Day & 1-Month)
On Monday, risk aversion reared its ugly head instilling fear and panic in the sentiments of all. However, a knight in shining armor rode to the rescue upon the next day’s arrival and reassured the masses of continued support for another two years at the very least. Sentiments improved and confidence was restored. But when the new day began, risk aversion returned with a vengeance - this time from the continent of Europe. Once again markets cowered in fear and panic once again reached extreme levels ( as did French credit default swaps). As the week drew to a close, however, calmer minds prevailed and sentiments stabilized as the beast out of Europe proved to be more fiction than fact and data out of the US provided some signs of recovery.
In volatile times, relationships either strengthen or sour. This past week was one of epic proportions (in terms of US equity market volatility) and the widespread fear led to most relationships tightening in response. After all was said and done, US stocks and commodity currencies (CAD, AUD, NZD) shared  drew closer together as did crude oil with JPY pairs. However, almost all those in FX-land shunned US 2-yr yields resulting in either weaker or a complete reversal of longer term relations (2-wk relative to 4-wk correlation coefficients).
The next chapter in the ongoing global growth risks saga begins next week. It’s hard to imagine another week as jam packed – absurd volatility in US stocks, speculation of another sovereign AAA credit ratings downgrade, a central bank commit to a minimum of 2 years of exceptionally low rates, another central bank take aggressive measures to devalue its currency, potential negative rates in the safest of FX safe havens, higher margin requirements on the most precious of metals, and short sale bans on financials in four countries - with such rapid pace and action as just ended. Nevertheless, price action next week may provide some clarity as to whether this global growth risks saga will have a happy, tragic, or neutral ending.

• Commodities-FX: AUD/CAD tracked best with crude oil at +0.68 (14-day) & AUD/JPY best with gold at -0.85 (14-day)
• U.S. equities-FX: S&P500 tightest with AUD/USD at +0.98 (14-day) & NZD/USD at +0.96 (14-day)
• UST Yields-FX: U.S. 2 yr. yields & EUR/USD short term (14-day) correlation coefficients completely reversed to -0.75
• FX-FX: Oceanic neighbors on the same page again as AUD/USD & NZD/USD tracked best among majors at +0.95 (14-day)

MEDIUM/LONG TERM CORRELATIONS (3-m & 1-yr)

The Correlations Corner (Calculations & Settings)

• Correlation coefficients calculations based on daily percent change for the specified time period.
• Two grids separated by time periods:
• S/T (short term): Bi-weekly = 14 days &  Monthly = 30 days
• M/T (medium term)- L/T (long term) : Quarterly = 90 days & Yearly = 365 days
• Currency pairs listed in black print ; other assets listed in blue print.
• Correlation coefficients greater than +.75 (strong positive) or less than -.75 (strong inverse) are highlighted in bold print.
• Coefficients shaded by varying tones of blue and red:

• Shading format - column based to allow visual representations for strengthening, weakening, and reversing relationships for the specified asset/currency pair (column) against the vertically listed currencies/assets (rows) . For example, the darkest shade of blue within a column (S&P500) denotes the specific security in that row (ex. USD/MXN Wkly) as the best correlated with the S&P500.
• Shading format - column based also allows visual representations of correlation breakdowns, reversals, & strength as time progresses. For example, a darker shade of blue for the weekly coefficient relative to the monthly coefficient suggests a strengthening positive correlation while a lighter shade of blue for the weekly coefficient relative to the monthly coefficient suggests a weakening correlation. A complete change in color from red to blue or vice versa suggests a complete reversal from the prior relationship.
• Other Assets: USOIL (WTI), UKOIL (Brent), JPNNKY (Nikkei 225), GMNDAX (German DAX 30), US2YY (US government. 2 yr. yields), US10YY (US gvmt. 10 yr. yields)

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