Currency managers rejoice as foreign exchange correlation hits lowest level since Lehman collapse
The foreign exchange market appears to have finally shaken off the tyranny of risk-on/risk-off (RORO), with correlation across dollar currency pairs dropping to their lowest levels since the start of the financial crisis.
That is good news for currency managers, who have seen the dominance of RORO undermine arguments that FX is an asset class in its own right and weigh on returns, as currency pairs reacted uniformly in swings in global risk appetite.
Stronger returns for currency managers as currency correlation drops
Normand says for fund managers who bemoaned the RORO tyranny of the past three years, in which diversification was unattainable as global markets and dollar currency pairs rose or fell together in response to global events, 2013 should be refreshing.
The ongoing slide in dollar-based correlations reflects as much the fading of systemic risks such as the US fiscal cliff as it does the rise of local ones, he says.
Currency markets havent seen this much diversification in five years.
That he says might explain why currency managers returns, as measured with the Barclay BTOP index, are up about 2% in January alone, which is equal to their average annualgain during the past decade.
Such a strong performance cannot be guaranteed to continue. One swallow, or in this case a January, does not make a summer.
A global theme might yet emerge to drive dollar correlations higher again Normand cites the possibility that government bonds extend their sell-off and force the unwinding of carry trades.
Still, for now at least, the worlds currency managers have something for which to be grateful.