Second Time

Saturday, December 12, 2009

Hat tip to my buddy, Patrick, over at Ramblings of a Systematic Trader

For the second time in recent history, the equity markets and USD moved up in tandem on Friday. As I mentioned before, the inverse correlation should not be taken as a permanent relationship. A look at the historical correlation chart should clearly illustrate this point.

Over a span of almost 2 decades, you can see that the correlation between the S&P500 index and the Dollar index have oscillated between +1 and -1. In fact, the correlation hit a record 2 decade low of -0.9561 recently. While I wouldn't go so far as to say that correlation should start to move into positive territory, I would think that it is a good bet that the negative correlation should decrease in magnitude going forward, at least in the short term.

This would have obvious implications on other asset classes whose price actions have depended on the strength (or weakness) of the USD, namely commodities especially Gold.


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