Shifting Correlations Euro and Yen

As Q2 winds down, it is interesting to look at shifting correlations for the euro and yen. The figures cited below are based correlation studies conducted on percentage changes rather than the levels themselves.

Euro: Over the past 2 months, the euro's correlation with US-German 2-year yield differentials has turned positive (0.3) compared with a negative reading year-to-date(-0.06). The correlation with the 10-year differential has more than doubled to 0.47 from 0.21 in the year-to-date period.

The euro's correlation with the S&P 500 edged higher over the past two months to 0.52 from 0.48 for the year-to-date, but the correlation with the Dow Jones Stoxx 600 has weakened to 0.33 from 0.45. The euro's correlation with gold has switched. For the year-to-date period the correlation is about 0.15, but over the past two months it is -0.37.

Yen: Earlier this year, the correlation of the dollar-yen and US-Japanese interest rate differentials had increased, while the correlation with the equity markets softened. Over the past two months, the correlations have moved in the opposite direction. The correlation with 2-year US-Japanese rate differential has slipped from 0.62 to 0.56. The correlation of 10-year differentials has also eased, but not as much.

The correlation with the S&P 500 has increased from 0.60 (year-to-date) to 0.71. The correlation with the Dow Jones Stoxx 600 has edged higher. The dollar-yen's inverse correlation to gold has intensified from essentially flat year-to-date to -0.35.

Meaning: The euro appears to have become more sensitive to US-German interest rate differentials and a little more sensitive to the S&P 500. It has tended in recent weeks to move increasingly opposite gold. The dollar-yen rate has become less sensitive to interest rate differentials and more sensitive to equity market. The dollar-yen also is increasingly moved opposite gold. These shifts reflect the reaction to the European debt crisis. When the crisis eases or is "normalized" (part of the backdrop not foreground) the correlations may reverse again.