In a note out Wednesday Nomuraâs FX team reckon weâre already starting to see small signs of the US dollar ending its inverse correlation with signs of risk-on sentiment. Firstly, with the S&P:
Correlations take time to flip, as they are backward looking by construction. But over the last week, there has generally been a shift with the dollar moving in the same direction as the S&P500 in four out of the last five trading days (a more ânormalâ ratio has 1:3).
Secondly, with US Treasuries:
The recent price action suggests that the relationship between US bond yields and the dollar is changing. The dollar has recently become negatively correlated with the slope of the US yield curveâmeaning the risk premium now being priced into the long end of the US curve is also affecting the dollar negatively.
This double whammy could have important consequences, adds Nomura:
From a policy perspective, it is well known that the combination of USD weakness and UST weakness is the one that the US Treasury fears and one that could trigger FX intervention to stabilize markets.
After six months the CAD and JPY slipped 1.6 and 2.7 per cent respectively, vis-a-vis the US dollar, which leads Wells to conclude:
Overall, we find the Canadian and Japanese experiences useful precedents, with currency declines of around 3% seenin the months following the initial downgrade. Past experience hints at a dollar decline of perhaps 3% to 5% in the months following a credit rating downgrade.
http://ftalphaville.ft.com/blog/2011/07/27/636201/alternatives-to-the-usaaa-dollar-edition/
Correlations take time to flip, as they are backward looking by construction. But over the last week, there has generally been a shift with the dollar moving in the same direction as the S&P500 in four out of the last five trading days (a more ânormalâ ratio has 1:3).
Secondly, with US Treasuries:
The recent price action suggests that the relationship between US bond yields and the dollar is changing. The dollar has recently become negatively correlated with the slope of the US yield curveâmeaning the risk premium now being priced into the long end of the US curve is also affecting the dollar negatively.
This double whammy could have important consequences, adds Nomura:
From a policy perspective, it is well known that the combination of USD weakness and UST weakness is the one that the US Treasury fears and one that could trigger FX intervention to stabilize markets.
After six months the CAD and JPY slipped 1.6 and 2.7 per cent respectively, vis-a-vis the US dollar, which leads Wells to conclude:
Overall, we find the Canadian and Japanese experiences useful precedents, with currency declines of around 3% seenin the months following the initial downgrade. Past experience hints at a dollar decline of perhaps 3% to 5% in the months following a credit rating downgrade.
http://ftalphaville.ft.com/blog/2011/07/27/636201/alternatives-to-the-usaaa-dollar-edition/
