Correlations between general risk appetite/equities and currencies have been unusually low for quite some time. As a result, currencies have reacted differently to changes in risk appetite, compared to what might usually be expected. However, more recently the relationship appears to have improved again in several cases, although correlations are still substantially weaker than previously. Considering daily changes in risk appetite and trade weighted currency indices for the past two months, the USD and especially the CHF appear to have reverted to their more traditional relationships with risk appetite, falling as it improves. Moreover the NOK and the CAD seem to possess the strongest positive correlations with risk appetite and are therefore expected to benefit most if it continues to increase. However, for several other currencies traditional relationships have ceased to exist. For example, the JPY is now positively (though fairly modestly) correlated, the total opposite of its traditional status as a safe haven currency. Moreover, the AUD, SEK and NZD remain basically uncorrelated to changes in general risk appetite. Consequently, those seeking to benefit from these fluctuations should play either USD/CAD or CHF/NOK.
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