When a market is hit with a major shift, correlations break down.
For years, the Canadian dollar was correlated with some combination of stocks, oil and metals. At the moment, it’s correlated with almost nothing.
In the past month, the USD/CAD correlation with the S&P 500 is 0.067, with oil it’s 0.123 and with a risk trade like AUD/JPY it’s 0.008. In the prior two years, those correlations were -0.608, -0.497 and -0.443 — all statistically significant.
Five takeaways:
- It’s a sign of broader divergence from risk on/risk off trading
- Countries and currencies are increasingly viewed independently
- The Bank of Canada shifted dovishly
- Speculative bets against CAD have been building
- Taper confusion reigns
