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US rates no longer drive USD/CAD, risk aversion could support EUR/USD – SocGen

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Nov 23, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Delhi) – Research Team at Societe Generale, suggests that the largest recent correlations between these two pairs and other markets – namely US rates and Brent prices – indicate an important change.

    Key Quotes

    “On the one hand, EUR/USD has been essentially correlated to US rates for the past three months, and that is still the case, while USD/CAD lost this correlation. This is the main explanation for the correlation break between EUR/USD and USD/CAD.”

    “On the other hand, the CAD remains strongly correlated to commodity prices, which are now inversely related to EUR/USD. We signalled that the euro could now benefit from the underperformance of risk assets, and the positive correlation with the VIX still holds. In other words, the traditional and strong correlations are still strong (EUR vs US rates, CAD vs Brent), while the second-order correlations (EUR vs Brent, CAD vs US rates) have switched.”

    “The correlation between EUR/USD and USD/CAD should stay weak as long as commodity prices and US rates continue to drive these pairs, as they are now doing. That should remain the case as oil prices softness – a deflationary threat – does not seem set to prevent Fed lift-off, since US rates are oriented upwards despite weak commodity markets. At some point, the options market should adjust to the low correlation between EUR/USD and USD/CAD, and the implied correlation should therefore gradually fall.”
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