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Forex Flash: Euro Sterling correlation has broken down - BBH

FXstreet.com (Barcelona) - Marc Chandler, Global Head of Currency Strategy at Brown Brothers Harriman notes that the correlation between the Euro and Sterling have broken down.

On a 60-day and 90-day rolling basis, the correlation is the lowest since 2000 at 0.21 and 0.34 respectively. He adds that rarely has the 60-day correlation fallen below 0.40 since the advent of the euro and rarely has the 90-day correlation fallen below 0.50. Additionally he notes that the 60-day correlation was fairly stable most of last year, even as the EMU debt crisis ebbed and flowed. He sees that the breakdown began in January as sterling sold off while the euro did not peak until early Feb. The correlation spent February and March mostly between 0.25-0.30 correlation, before slipping in early April as sterling was carving out a bottom, while new pressures weighed on the euro. He writes, “Initially the weaker correlation coincided with a jump in implied volatility. The benchmark 3-month implied vol jumped from 5.3% in early January to 9.5% by late February. It has been trending down March and early April to stand near 6.8% today, which represents nearly 2 1/2 month lows.”

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Lee Hardman, FX Analyst at the Bank of Tokyo Mitsubishi UFJ notes that the Euro also appears to be befitting from the renewed search for yield amongst investors, attracted by the higher yields on offer in the Eurozone.
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