The Correlation of US Bonds Yields to USDCHF

US bonds yields have shown a historical correlation to USDCHF

Since 1990, and especially after 2007, global financial markets operate as a unified investing area. An area that incorporates several different combinations of risk/return. If the combination of risk/return shifts significantly in one market then immediately all the other financial markets follow. The aim is always to achieve equilibrium between risk and return.

 

The Relation of US Bonds and USDCHF

The mechanisms behind the bond markets are very similar to the mechanisms of Forex markets. Bonds and Forex currencies are both linked to the current level of interest rate. Any change in the level of interest rates or in the broader interest rate expectations creates a new risk/return equilibrium.

The rates of US Bonds show historical correlation to USDCHF. The Swiss Franc along with the Japanese Yen offer traditionally very low-interest rates. Hence, if US rates start moving higher investors tend to go long on USDCHF in order to implement carry-trading strategies. In other words, they go long on USD against the CHF in order to collect the positive USDCHF overnight rate.

Chart: 10-Year Note Rates and the USDCHF (ForexExperts.net via Google Finance)

10-Year US Note Rates and the USDCHF

 

Correlation Between USDJPY and Stock Indices

 

Historically, the American indices (S&P 500, DJIA, NASDAQ) are trading in the same direction with USD/JPY (the American Dollar against the Japanese Yen).

 

Defining Correlation:

In general, a correlation between two variables expresses an average relationship that is backed with historical data. The correlation coefficient receives values between -1.0 and +1.0, and that means:

  • +1.0 is the perfect correlation reflecting identical movements / directions

  • -1.0 is the perfect negative coefficient reflecting identical opposite directions

US Dollar Correlation Coefficient

By comparing USDX (US Dollar Index) against Dow Jones industrial in the past 20 years we get a correlation coefficient around +0.35. That positive relation (+) means that the US Dollar and DJIA move generally in the same direction. On the other hand, as the correlation coefficient is only 0.35, only 35% of all DJIA movements are linked to the US Dollar movements.

There is a good reason for that.

As the demand for American stocks increases the demand for US Dollars increases too, as US Dollars are needed in order US stocks to be purchased. Below we are going to see why the Forex pair USDJPY is more correlated to US equities than any other pair.

 

Crude Oil and Forex Market Correlation (USDCAD, CADJPY, USDRUB, USDNOK)

One of the most important Forex and commodity correlations exist between USDCAD and Crude Oil.

 

The correlation between the Canadian dollar vs US dollar and the oil price is very high. Historically, there is 0.75-0.80 positive correlation between CADUSD and oil prices.

CADUSD and Oil Price 0.75-0.80 positive correlation

CADJPY and Oil Price 0.80 positive correlation

 

There are also other Crude Oil and Forex correlations including USDRUB (USD vs Russian Ruble), USDNOK (USD vs Norwegian Krone), and CADJPY (Candian Dollar vs Japanese Yen).

 

Explaining the Negative Correlation between USD and Crude Oil

 

All commodities are priced in US Dollars, and consequently, there is a negative correlation between the US Dollar and Commodity Prices.

This is a simple example explaining why.

If the Demand and the Supply for a particular commodity are stable (for example Crude) and the US Dollar appreciates 10%, then the price of this commodity appreciates also 10%. But as there is no additional demand to support this new price level the price of the commodity falls to find a new equilibrium between demand and supply. That means the commodity prices move always in the opposite direction to US Dollar.

AUDUSD and Gold Price Correlation

■ AUDUSD has a positive correlation with Gold

■ AUDUSD has had an 80% historical correlation to the Gold Price

The Australian Dollar against the US Dollar is highly correlated to the gold price. This is due to the following reasons:

  • Australia is an important gold producer (9.4% of global production in 2014)
  • Australia’s gold reserves of 9,800 tonnes count 18% of global reserves
  • The Gold Price is by rule negative correlated to the US Dollar

Chart: Global Gold Resources

Global Gold Resources

Source: United States Geological Survey (USGS)

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