Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Currencies Break Link With Stocks to Warn of Turbulence Ahead

Published 08/18/2020, 06:22 AM
Updated 08/18/2020, 06:45 AM
© Reuters.  Currencies Break Link With Stocks to Warn of Turbulence Ahead

© Reuters. Currencies Break Link With Stocks to Warn of Turbulence Ahead

(Bloomberg) -- The U.S. dollar is driving a wedge between volatility expectations for global currencies and stocks.

The greenback’s plunge last month jolted currencies so profoundly that expected swings in the market are no longer correlated with a similar measure for U.S. equities.

“It’s a reminder that dollar moves could be an outsized driver of risk, sentiment and narrative over the next few months, if they continue with the recent volatility experiences,” said London-based John Roe, head of multi asset funds at Legal & General Investment Management. For equities, there’s a “feeling that the fireworks are over for now,” he said.

That’s because currency traders are anxious about the unknowns of the coming months and their impact on the dollar. These include the U.S. presidential election and the risk of a winter surge in coronavirus infections in the northern hemisphere, a factor that has played in the euro’s favor after European governments proved to be quick to implement mitigation measures.

And at the same time, implied volatility for equities is falling as central-bank stimulus whitewashes a plethora of risks weighing on company revenue. Goldman Sachs Group Inc (NYSE:GS). joined other firms in raising its year-end target for the S&P 500 Index, which is close to a record high.

While the VIX Index of U.S. stock swings has fallen to the lowest since Feb. 21 on a closing basis, the JPMorgan (NYSE:JPM) Global FX Volatility Index is near the highest since May. The disparity drove the 40-day correlation between the two measures below zero this month to the lowest since 2009.

“The lack of correlation highlights the diversification out of U.S. dollar,” said Sophie Huynh, multi-asset strategist at Societe Generale (OTC:SCGLY) in London. “The question is whether we will have the same move in equities.”

©2020 Bloomberg L.P.

 

Latest comments

Yes, I noticed this from as early as early July. Commodity sensitive currencies decoupled from equity, a situation so similar to aftermath of 2009 crash.
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.