Over the course of 2011, I had often posted on the correlation with between the euro and the S&P 500. My last note was mid-December. While recognizing that the 60 day rolling correlation (based on percent change) was still firm near record highs (set Dec 2 near 0.85) we noted that the 30-day correlation had begun slipping. We suggested that the 30-day was providing a lead indicator of what was going to happen to the 60-day correlation.
It is a month later. As of yesterday the 60-day correlation stands near 0.78 and the 30-day correlation has fallen from 0.81 in the middle of last month to 0.65. This gives additional evidence of some fracturing of the risk-on/risk-off rubric that has been such an important characteristic of the investment climate.
There is an other sign that market conditions are changing. We looked at the correlation between the 3-month euro implied volatility and the volatility of the S&P 500, the VIX. On a 60-day rolling basis, the correlation reached a record of 0.73 in late Nov, It now stands near 0.66. This is still relatively strong as the correlation since the early 1990s (using a synthetic euro for pre-1999), has rarely been above 0.6.
The 30-day correlation has broken down more significantly. It now stands near 0.24, down from a record high of 0.84 in early Dec.
On the other hand, the euro’s correlation with other currencies thought to be part of the risk-on complex, like the Australian dollar and the Swedish krona, remain firm, even off their recent highs. This suggests then that while the euro’s correlation with the US S&P 500 has weakened, diversification in the currency market is still difficult to secure.
Lastly, many investors are also interested in the correlation between gold and the euro. On a 60-day rolling basis, recall that the euro was inversely correlated with gold form early Aug last year through early Nov and then turned positive. It reached the high for the year, which was also its highest level since Q1 10 in late December just below 0.58. It is near 0.54 now. The 30-day correlation of euro and gold is near 0.60 and rising.