What is in correlation in the FX space? - Nomura

Analysts at Nomura explained that the list of the top 10 positive correlations is dominated by nominal rates differentials (2yr, 5yr and 10yr) and SEK (crossed with USD, NOK and EUR).

Key Quotes:

"The relationship between NZD/USD and EUR/CAD and their respective nominal rates differentials also feature in this week’s list of top correlations, with the former correlation realizing all-time highs of around 64% as of writing (sample going back to 2000).

Digging beyond the top 10 relationships, we find some interesting developments in standard JPY correlations: the correlation between USD/JPY and the 2s10s JPY swap slope has grown more positive in recent weeks after bottoming out in September, receiving a notable boost right after the US presidential election, reflecting the recent bid in USD/JPY on the back of higher US yields.

In response to steepening pressures, the BOJ has announced it will purchase 1-5yr JGBs at designated prices, successfully lowering the shorter-end of the curve, which should continue work negatively for JPY going forward, particularly given the Bank’s commitment to sustaining lower JGB yields, even amid higher global yields.

Relatedly, the correlation between USD/JPY and the performance in the Nikkei index has grown more positive in recent weeks, after bottoming out at insignificant levels right before the US elections. This trend should continue provided that risk sentiment remains supported in the new BOJ policy regime and given the (positive) backdrop of rising yields abroad.

On the negative correlations side, the relationship between NZD/USD, AUD/USD and 10Y UST yields has grown notably in the last two weeks, and has moved to new all time lows for NZD/USD (-62% and -59% respectively as of writing).

Unsurprisingly, the list of the top two-week changes in correlations is dominated by factors that capture recent US-specific dynamics (10yr UST yields, 2s10s UST slope and copper prices). Specifically, EUR/GBP and GBP/CHF seem to be the FX crosses whose traditional relationships with these factors most noticeably changed after the US elections and the resulting sell-off in global rates that has been sustained by renewed reflationary expectations."