Forex Carry Trade Correlation to CRB Index at Record Highs

The Forex Carry Trade correlation to the Reuters CRB Commodities index is now at its highest in at least 10 years, and it seems that recent recoveries in global risk sentiment have led to similarly strong links to the S&P 500 and other key risk barometers.

The 50-day correlation between Carry and the CRB now stands at an impressive 0.75; movements in the CRB can ‘explain’ 56.25% of those in the reference G10 Carry Trade index. We likewise note that the commodities index retains a similarly strong link to the S&P 500, and it’s clear that these key risk barometers are once again tracking each other quite closely.

The increasingly strong link across these scarcely related asset classes underlines the level of “reflation” in financial markets. The US Federal Reserve and other major world central banks have taken great steps to boost money supply, and many market indicators suggest that these measures have largely been successful. In fact, a glance at US Credit markets shows one measure of credit health—the spread between US Treasury Bill and US Dollar LIBOR rates—remains at its narrowest in nearly 2 years.

Risky asset classes continue to rally across the board, but one has to wonder whether these improvements are truly sustainable in the face of clear global economic headwinds. The S&P 500 now stands a respectable 4.6 percent higher on a Year-to-Date basis—having rallied an astounding 41 percent off of multi-year lows. Of course, the index likewise remains a similarly dramatic 40 percent off of all-time highs. A “bear market” is defined as when markets lose 20% of their value. Given that current conditions clearly qualify as a bear market under this definition, we can only assume that we are in the midst of a strong bear market rally.

Forex Correlations Summary

Forex correlations against Oil, Gold, and the S&P 500 for the past 30 calendar days:

Written by David Rodriguez, Quantitative Strategist for
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