Correlation between the Dow and Carrytrade.

F

frank99

After this last unwind, I noticed a very heavy correlation between the Dow (US Stock Market) and the unwinding of the GBP/JPY carrytrade - as well as other Yen carrytrades. It seemed as while the market was going up, the GBP/JPY was going up, when the market was going down, the GBP/JPY was going down. There appeared to be a direct ratio between the two during the unwind.

I looked back at the unwind in February, and found the same thing.

Has anyone ever looked into this further to see if there is a direct correlation or is there only a correlation during an unwinding of the carrytrade?

If there is a correlation, there are hedging possiblities between these two markets.

What do you guys think?

Thanks,

Frank
 
Monthly :
Long term (1990-present) correlation weak
short term (2004-present) very strong


<img src="http://elitetrader.com/vb/attachment.php?s=&postid=1553121" border="0" alt=""><br /></font></p></font></p>

I don't trade forex, but have at the data.
You'd get better correlation numbers for daily data, but I didn't have that available.
So, here's a bird's eye view.
 

Attachments

Thanks very much for sharing this data and graph/chart! I really appreciate it. It appears that the correlation exists as it has appeared.


Frank
 
Can you please elaborate? I'm not sure what you mean and why.


Thanks,


Frank


Quote from Spectre2007:

it means when you get a margin call in one the other is susceptible to redemption.
More...
 
A correlation is just a correlation. It doesn't imply a causal link or that it will continue in the future. I have a spreadsheet model for USDCAD based on oil prices and interest rates that correlated beautfully over 14 years of data and correctly predicted last year's move from 1.09 to 1.17 - and then in February it came
unglued and USDCAD suddenly plunged. Why? The world seemed suddenly to fall in love with CAD because of strong economic data and M&A activity, none of which seemed to have mattered before. Predicting the past is easy ... it's the future that gives you more trouble.
 
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