A Correlation at All-Time High

03/12/2013 9:00 am EST

Focus: CURRENCIES

Jared Woodard

Principal, Condor Options

After the most recent election, the Japanese government made no secret of the fact that it was willing to do whatever it takes to devalue its currency, Jared Woodard of CondorOptions.com notes an increased correlation with the Nikkei.

The decline in the yen since last October has given a boost to export-oriented Japanese companies, and the Nikkei has rallied accordingly. Historically, though, USD/JPY and Japanese equities haven’t been nearly so correlated.

chart
USD/JPY – Nikkei six-month realized correlation, 1980-2013. Source: Nikkei, FRED
Click to Enlarge

Six-month realized correlation between the currency pair and the stock index reached levels in January that have been seen only rarely since 1980.

chart
USD/JPY – Nikkei one-month realized correlation, 1980-2013. Source: Nikkei, FRED
Click to Enlarge

And if you’ll excuse the noise, you can see above that one-month correlation in January reached a new high at about 0.81.

For the last few months, the short yen/long equity orientation really has been all one trade. If correlations revert to longer-term averages, though, it will start to matter more how traders express their views about the deflation-fighting power of Abenomics.

By Jared Woodard of CondorOptions.com

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