The Global Markets, whether it be Equities, Fixed Income, Commodities or FX are in a “heightened state” of risk aversion following the plethora of economic data coming out of China in the last month or so.
As a result of this “fear” we are seeing that many EUR crosses becoming highly correlated to S & P Futures. In economic terms this is due to substantial EUR shorts and the use of EUR as a “funding” currency due mainly to the ECB (European Central Bank) QE (Quantitive Easing) program.
A great example of this is seen here with EUR/AUD and SPX over recent weeks. The below looks like a great Rorshach or Ink Blot test:
Now if we reverse the vertical access of SPX we get the following:
As you can see there is a very distinct and obvious correlation between EUR/AUD and SPX!
We previously discussed the use of RSI (Relative Strength Indicators) which can assist you in “confirming” your strategy similarly correlations can act in the same way.
So correlations can be helpful in developing a trading strategy, or can be added to an existing one. Look for what “leads” the other and you may find some really interesting trading opportunities.
EUR/AUD’s correlation to the SPX over the past month is close to 86%. Other pairs that have a close correlation include: EUR/CAD (-88%), CAD/JPY (84%), EUR/USD (-81%), AUD/JPY (79%) & USD/JPY (78%).
You will find (through research) that there a multitude of correlations in FX. Take a look at FX correlations to NY/MEX Crude Oil. Specifically EUR/NOK (-72%).
It is important to remember that these correlations can reverse – so always be aware of economic data that can directly affect the markets such as Central Bank Announcements, US NFP and more.