Thursday, June 13, 2013

The blurring of the risk-on/risk-off effect

As a follow-up to the discussion on "risk-on/risk-off" (see post), there is further evidence that the market dynamics that have been in place over the past four years have recently been altered. The negative correlation between the US dollar and the US equity markets is nearly gone.

Correlation between the S&P500 and the dollar index (DXY)

As an illustration, consider two periods - now and late 2011. The chart below shows the comparison.

A sell-off in US equities no longer implies we should necessarily expect a rally in the US dollar. The so-called RORO effect is becoming blurred - at least when it comes to these two markets.
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