Correlation between the Dow and Carrytrade.

Discussion in 'Forex' started by frank99, Aug 2, 2007.

  1. frank99


    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?


  2. Monthly :
    Long term (1990-present) correlation weak
    short term (2004-present) very strong

    <img src="" 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.
  3. frank99


    Thanks very much for sharing this data and graph/chart! I really appreciate it. It appears that the correlation exists as it has appeared.

  4. it means when you get a margin call in one the other is susceptible to redemption.
  5. frank99


    Can you please elaborate? I'm not sure what you mean and why.



  6. 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.