Sterling Disturbing Correlation

by Ashraf Laidi
Oct 12, 2016 14:49

Most traders are aware of the positive correlation between equity indices and high yielding currencies such as the AUD and NZD. But something else has come up as of late. GBPUSD has grown positively correlated with equities, especially US indices (DOW30 and SP500). I have already mentioned this in several tweets earlier this month, asking followers why GBPUSD outperforms EURUSD and USDJPY during rallying stocks and why it is among the big losers during risk-off. Said differently, EURGBP tends to rally as stocks decline and vice versa. Why has GBP become a risk-on trade?  1) The UK's swelling current account deficit of 5.7% of GDP and 2) the structural downside risks of Brexit imply it will be more challenging for the UK to draw necessary funds to finance the deficit, especially at a time when the currency has fallen to the mercy of soundbites by bankers mulling departing London, politicians discussing Hard Exit. The situation with high CA deficit currencies becomes worse when the central bank is easing (or not hiking), as was seen in the case of the USD in 2006-7.

Sterling Disturbing Correlation - Gbpusd Correlation (Chart 1)

 

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