Today, let us take a look at the correlation report between the EUR/USD and S&P 500 for the month of Jan 10
Looking at the side by side comparison of the two graphs above, Jan 10 brought us back to the risk aversion trading theme. When investors are risk adverse, they exit risky assets such as equities and seek the safety of low risk assets such as the US Dollar. Therefore as the S&P 500 falls in value due to negative sentiments, the US Dollar strengthens due to increased demand. With this theme, when the sentiments are good, the reverse usually happens.
As i mentioned previously, during Dec 09 the liquidity is low and this may be why the risk averse trading theme did not appear as institutional trading activity is being replaced by speculation. Furthermore, economic releases from the US in the month of Dec 09 were mainly positive. This may also cause a shift from the usual risk aversion trading theme to one of a fundamental theme where by a performing economy benefits its equities and currency.
Looking forward, Febuary 10 brought us numerous positive US releases so far. We may see a shift again. Stay tuned for this report next month.