Correlations Corner, January 2012: Strained Relationships

In January, risk sentiments see-sawed back and forth due to seemingly endless Greek-PSI negotiations, an unexpected shift lower for U.S. economic data, improving data releases out of China, and renewed fears regarding Portugal’s debt sustainability. However, spate of positive Euro-area PMIs yesterday sent USD plunging lower as the month kicked off.

Cross asset correlations in January have taken quite the plunge as well (see charts below). The Fed’s pledge to keep rates ‘exceptionally low’ until 2014 has been weighing on USD leading to concurrent JPY strength as JGB’s have mimicked US Treasuries. Similar observations were noted by Japan’s Azumi who said FOMC signaling low rates also pushing yen up.  

However, the upcoming slate of heavy data and event risks in February – U.S. Jan NPF (03-Feb), ECB policy meeting (09-Feb), Greek general elections (20-Feb), EU Eco-fin meeting (21-Feb), & 3yr LTRO allotment (23-Feb) – may see cross asset correlations come back inline. If such assumptions are true, the risks seem skewed for any potential re-synchronization to likely be a result of downside pressures stemming from the substantial structural and implementation difficulties standing in the paths to effective fiscal reform in many Euro-area economies.

NOTABLE AMERICAS & EMEA FX

    * S&P 500 & EUR/DKK at +0.58
    * S&P 500 & USD/HUF at -0.56
    * US OIL & EUR/CHF at +0.41
    * XAU/USD & USD/TRY at -0.61
    * XAU/USD & USD/CAD at-0.94
    * USD/PLN & EUR/USD at -0.93
    * USD/CHF & EUR/USD at -0.98
NOTABLE ASIA | PACIFIC FX

    * S&P 500 & EUR/JPY at +0.60
    * S&P 500 & AUD/JPY at -0.60
    * US OIL & USD/SGD at -0.54
    * US OIL & NZD/USD at 0.48
    * XAU/USD & USD/SGD at -0.65
    * CRB INDEX & USD/SGD at -0.65
    * CRB INDEX & NZD/USD at +0.65
    * USD/SGD & AUD/USD at -0.81
    * USD/CHF & EUR/JPY at -0.83