Baltic Dry Index Sinks; Currency Impact

The Baltic Dry Index has fallen for the 28th consecutive session today. It is the longest decline in six years. During this swoon the index has fallen 49%. The main driver seems to be concerns about the cooling of China's steel sector. Steel is the biggest user of iron ore. Iron ore and coking coal account for more than a third of the baltic dry freight.

The correlation between the Baltic Dry Index and some currency pairs have increased marked over the past couple of months. Of note, the strongest correlation over the past two months has been with the Korean won/dollar at about 0.4. From the beginning of the year through 8 May, the correlation was 0.036.

Of the various currency pairs we looked at the Israeli shekel was also interesting. The dollar-shekel correlation has risen to 0.37 from 0.05 in the the start of the year through 8 May period.

The euro is also interesting. For the first part of the year, the correlation stood at 0.006. Now its stands at -0.30.

Most of the currency correlations we looked at have grown stronger in the more recent period. However, it as is often the case, correlations should not be confused with cause and effect. One hypothesis is that there is a really a third element here. The collapse of the Baltic Dry Index corresponds to increased concern about the trajectory of world growth.

If the China news today is on the money--that it will be boosting infrastructure spending in the western provinces, the Baltic Dry Index may find some support. Another possibility is that was the European bank stress test results draw closer, it may overshadow the growth (or lack thereof) theme.