What is correlating in FX? - Nomura

Research Team at Nomura, suggests that dominating the list of the top 10 positive correlations is the relationship between EUR/GBP and its own 3M ATM implied volatility.

Key Quotes

“Otherwise, the list is relatively unchanged with respect to two weeks ago, where 2yr and 5yr nominal rate differentials continue to crowd out most other correlations in FX. USD/JPY and the Nikkei index have moved more in tandem since the second-half of October, and thus the correlation has grown more positive, probably buoyed by U.S.-specific factors (USD strength initially in October, followed by U.S. election-related volatility at the turn of November).

The list of top 10 negative correlations is relatively unchanged with respect to two weeks ago, and is dominated by changes in the price of gold (e.g., with USD/JPY and USD/CHF) and traditional proxies for risk (10Y UST yield and 3M ATM volatility).

USD/CNH does feature in our list of top two-week changes in correlations (Figure 2). Notably, the correlation between the cross and 10Y JGB yields has grown more positive in the last two weeks (a similar pattern is seen in USD/JPY, where the correlation to 10Y JGB yields has turned positive for the first time since August). Also, the correlation between USD/CNH and iron ore prices has grown less negative (now an insignificant - 12.5% vs. around -42% just two week ago). Interestingly, USD/CNH correlation with cVIX (traditionally highly positive) has now fallen to multi-year lows (-25% vs. a local high of +54% in May). The collapse in this latter correlation began in earnest in October, where USD strength at the turn of the month eased broad FX volatility conditions as key crosses traded in a more directional fashion (e.g., EUR/USD, USD/JPY and GBP/USD, which constitutes around 70% of the cVIX basket).”