After this last unwind, I noticed a very heavy correlation between the Dow (US Stock Market) and the unwinding of the GBP/JPY carrytrade - as well as other Yen carrytrades. It seemed as while the market was going up, the GBP/JPY was going up, when the market was going down, the GBP/JPY was going down. There appeared to be a direct ratio between the two during the unwind. I looked back at the unwind in February, and found the same thing. Has anyone ever looked into this further to see if there is a direct correlation or is there only a correlation during an unwinding of the carrytrade? If there is a correlation, there are hedging possiblities between these two markets. What do you guys think? Thanks, Frank
Monthly : Long term (1990-present) correlation weak short term (2004-present) very strong <img src="http://elitetrader.com/vb/attachment.php?s=&postid=1553121" border="0" alt=""><br /></font></p></font></p> I don't trade forex, but have at the data. You'd get better correlation numbers for daily data, but I didn't have that available. So, here's a bird's eye view.
Thanks very much for sharing this data and graph/chart! I really appreciate it. It appears that the correlation exists as it has appeared. Frank
A correlation is just a correlation. It doesn't imply a causal link or that it will continue in the future. I have a spreadsheet model for USDCAD based on oil prices and interest rates that correlated beautfully over 14 years of data and correctly predicted last year's move from 1.09 to 1.17 - and then in February it came unglued and USDCAD suddenly plunged. Why? The world seemed suddenly to fall in love with CAD because of strong economic data and M&A activity, none of which seemed to have mattered before. Predicting the past is easy ... it's the future that gives you more trouble.