Grokking the Canadian Dollar in Three Correlations

By Marc Chandler

I have written recently of the euro’s correlation with the S&P 500. I concluded that although the correlation has weakened, it remains elevated. We vigilantly monitor that relationship because it seems that it is representative of the risk-on/risk-off rubric that still is so influential for both short-term traders and longer term investors.

In this post, I look at the Canadian dollar’s correlation with the S&P 500, oil and the euro.

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S&P 500: The Canadian dollar tends to be positively correlated with US equities. The 60-day (percentage change) correlation has been positive since briefly being inverse in mid-2008. Brief periods of inverse correlation are recorded typically every couple of years.

The highest correlation since at least the early 1990s was recorded in mid-December near 0.90. The correlation stands at 0.87 now. The 30-day correlation peaked in late November near 0.92 and is now just below 0.79, having fallen sharply since the start of the year.

It may also be helpful in this context to identify the correlation of several other currencies to the S&P 500 for comparison sake as well as being informative in their own right. Among the currencies we examined, the Canadian dollar is among the most correlated to the S&P 500. Here are the 60-day correlations for a selected sample. EUR 0.78 GBP 0.66 SEK 0.79 MXN 0.82 AUD 0.91.

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Oil: In our explanatory framework for currency movement we tend to give more weight to the capital markets rather than the goods market. Many market participants though think of the dollar-bloc currencies, for example, as commodity currencies. Canada is a large producer of oil and 90% of its oil exports are to the US.

We looked at the Canadian dollar’s correlation with the generic WTI crude oil futures contract. The 60-day correlation is about 0.40. It was inversely correlated in the Feb-March period last year, which was the first inversion since 2007. The high since at least the early 1990s was set at the end of 2010 near 0.76. The 30-day correlation is almost at 0.60.

The Canadian dollar’s correlation with oil is currently at the upper end of the currencies we looked at. Here are the 60-day correlations for a selected sample. EUR 0.36 GBP 0.36 NOK 0.38 MXN 0.38 RUB 0.49 AUD 0.53

That the Australian dollar is more correlated to oil prices that the oil producers suggests more subtle and complex relationships may be at play. Out of curiosity, we ran the 60-day correlation of the S&P 500 and oil. It is near 0.46. The correlation briefly was inverse in early 2011, for the for the first time since 2008.

Euro: The Canadian dollar remains highly correlated with the euro. The 60-day correlation is near 0.77. The highest since the early 1990s was recorded in mid-2008 near 0.80. The current reading is the highest since that record. Last February, it had fallen to around 0.15.

Here are the 60-day correlations for a selected number of currencies: JPY 0.55 GBP 0.76 AUD 0.78 CHF 0.88 SEK 0.91 NOK 0.92

The Canadian dollar’s correlation with the euro is not exceptional. The above 0.90 correlations of the Scanid bloc stand out. The relatively high correlations among the majors suggest that the risk-on/risk-off rubric is still a major feature of the investment climate. The Japanese yen stands out, but at 0.55 the correlation appears too high for those investors looking for diversification.

The correlations need to be monitored on an ongoing basis to detect shifts in the investment climate. More work also needs to be done on the stability of the correlations.

The brief study presented here shows that over the past 60 days, the Canadian dollar has been more correlated with the S&P 500 than most currencies we looked at, and is also highly correlated with the euro, though in line with most of the other major currencies. It correlation with crude oil is considerably weaker than with the S&P 500 or the euro, but is also in line with most of the other currencies we looked at.

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