S&P 500 and the Dollar: Weakening of the RoRo Trade

The US is in the middle of Q3 earnings reporting season. A fifth of US S&P 500 have reported (some 70% have beaten the managed expectations) and another third report this week. One theme that has been driven home by a number of companies is the two-prong challenge posed by China. Some have noted the slowdown in the Chinese economy. Others have emphasized that the cost of doing business in China is increasing.

The decline in the S&P 500 before the weekend was the largest drop in four months. Still follow through selling today has thus far been minimal. A convincing of Friday's lows would immediately signal a test on the 1425-1427 recent lows. We note that the three mini-highs recorded since early September have been recorded with lower momentum (14-day RSI readings).

The divergence between the improving consumer confidence and the poor business confidence is stark. Judging from the recent retail sales and auto sales data, consumption is faring better than many expected, given the high level of unemployment and job insecurity. Auto sales are particularly impressive. The 14.9 mln unit sales pace in September was the highest since March 2008. It represents about a 15% increase on a year-over-year basis and this is on top of the 15% increase last year. It is also markedly different from the 4-9% decline being reported in Europe.

It is interesting to review the S&P's correlation to a number of different currencies. We look at the correlations of the percent change in the S&P 500 and in the currencies.

The euro's correlation over the past 60 days stands at about 0.53 after reaching 0.65 in late-August through mid-September. The 30-day correlation has rebounded smartly from a dip below 0.30 in mid-September to near 0.67 currently.

The Australian dollar's 60-day correlation with the S&P 500 has dropped off from near 0.85 in late-July through late August and is now below 0.55, the lowest since April 2011.

The Canadian dollar's 60-day correlation has also weakened. It has fallen from above 0.85 in June through August and now, near 0.63, is also near the lowest since April 2011.

The yen often trades inversely to the S&P 500. The 60-day correlation is near -0.15, which is a 7-month high. In late-May and early-June, the correlation was -0.45.

The Mexican peso, which has seen its correlation with the S&P 500 above 0.80 earlier in the year, has also seen the relationship ease. Near 0.57, it is the lowest since January 2010.

The S&P 500 has been a proxy for the risk-on trades. The strong correlation between some currencies and the S&P 500, or in the yen's case, the deep inverse correlation was widely understood as a sign of the importance of the risk-on/risk-off matrix that seem to drive asset markets. However, the snapshot of the rolling 60-day correlations presented here suggest some easing of the "RoRo" trade.