| Correlation, correlation, correlation |
| 24.11.11 11:18 | |
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The Financial crisis in 2008 became synonymous with the risk on/risk on trade. Correlations between assets strengthened dependent on whether they were considered a risk asset or not. These correlations persisted through 2009 and then began to relax as confidence in the global recovery began to strengthen and assets started to take direction again from their various domestic fundamentals. That said many emerging market currencies retained a loose correlation with other ‘risk’ variables such as the S&P 500. This illustrates that the market never quite let go of the risk on/risk off trade. The intensification of the Eurozone crisis is ensuring that correlations are again tightening. Yesterday all G-10 and Eastern European currencies underperformed the USD as investors ploughed back into the greenback. For the majority of these currencies their underperformance vs. the USD yesterday was by fairly similar margins, with GBP/USD holding in best and the AUD/USD seeing the greatest fall. In so far as the US has a poor fiscal position and a current account deficit the USD does not have many of the desirable attributes of a safe haven currency. However, it does have liquidity and in time of intense uncertainty investors need the reassurance of being able to easily get their hands on their money. Until the Eurozone authorities signal a clear intent to step up their defence of EMU, we expect the USD to retain a strong bid across the board. We look for a move to EUR/USD1.3300. source: Rabobank |
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