A Study in Correlations: EUR/USD vs. SPY

For most of October and early November $EURUSD moved in line with equities ($IWM, $SPY) in a risk conveyor belt trade. During the past several days this correlation has broken down as EUR/USD has been firmly bid on dips below 1.35, meanwhile, equities have continued to make lower lows:


During the last week EUR/USD has stabilized around 1.35 forming a falling wedge chart pattern which could signal a bottom is forming.

Meanwhile, the S&P 500 has fallen by more than 8% since topping out above 1292 on October 27th:

Why the sudden disconnect between the largest and most liquid currency cross and the largest equity index in the world? Of course there are probably numerous potential explanations but the simplest one is probably the correct one. The ECB has continued to carry out a much tighter monetary policy stance compared to the US Federal Reserve and perhaps the market has come to the realization that the ECB will not ease much further (rate cuts, QE). Moreover, equities appear to have gotten a bit overheated relative to EUR/USD last week:


It is important to be aware that correlations and relationships are always evolving in financial markets, particularly when drawing comparisons/correlations across asset classes. A tight ECB may be bullish for EUR/USD but it is certainly not bullish for SPY – it will be interesting to see how this relationship continues to evolve over the coming days/weeks.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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