The Correlation Game
Actual correlation between S&P 500 and Eur/Usd
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| От 02 ноември 2011 |
Actually there is a strong correlation between the Eur/Usd and the S&P 500. This correlation is one of the most important correlations in the market but sometimes it is stronger and some times it is a weak one. Recently the correlations has been very strong, astonishing I may say.
Rallies in the equity market (as indicated by the S&P500) cause an increase in investors' risk appetite, which leads them to pursue higher-yielding currencies in exchange for the safe-haven USD. And since the EUR is widely considered as the "anti-dollar", the EURUSD has a strong positive correlation to the S&P500.
The Correlation on daily chart started somewhere in September. I mean the correlation game is something very dynamic. There is a whole class of trading systems based on correlation trading. However the correlation is not an easy game. But look at the chart as the both instruments are correlated each other on of them is leading the other. And that can be used as a predictive tool. For example to learn a neural net to make a prediction based on the correlation between the instruments. However as I wanted to precise that is not easy because correlations are not stables.
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| От 02 ноември 2011 |
Comments
I mean that it looks like that the todays levels of positive correlations are the highest historical levels
Here I made a correlation analysis between the S&P 500 and EURUSD from the beginning of October with sample by 1 h chart. Howver I used SSA end pointed with lag 20 and 2 computations to smooth the series and to calculate the the correlations. Here are the results, if I calculate the correlations between the closes the values are much weaker, like 0.1 correlation.
Here I add another shot about the correlaction between EUR/USD and the S&P 500. You can see that the coleration still remains very strong. Here I do not calculate the actual coleration but visually it is very strong. It looks like the S&P 500 leads a little bit the EUR/USD.
I think we should continue to monitor this relationship as it could give some hints about a major market reversal.
It looks like the correlation between the EURUSD, and the S&P 500 remains for the moment. I write that here because this correlations remained from the moment this article was uploaded.
Nowe we can observe that a correlation exist between the EURUSD and the Gold.
Now it is really interesting how the markets are correlated. No true diversification LOL.
Here I just reminds for this market relationship. Is it possible to profit from it, yep that is a completely other question.
One of the possibilities is to examine visually which market is leadining and which market is following.
For example the EURUSD may be a leading indicator for the US markets, any ideas are welcome.
The other quick idea is to use a neural network and to use the correlations as inputs.
The third idea is the arbitrage and pair trading. Unfortunately I do not have experience with this kind of trading styles.
Which tool did you use for this purpose ?