Reader Request: Correlation of the Euro and S&P 500

We recently wrote about the high correlation of the intra-day moves between the Euro and the S&P 500 index. A reader commented that they would like to know more about the longer term correlation of the two.

cor ·re ·la ·tion/ËŒkôrəˈlāSHÉ™n/

  1. A mutual relationship or connection between two or more things.
  2. Interdependence of variable quantities.

We went back and took a look at a few indices and put them against each other to see if there was something occurring that was simply a coincidence. Correlations will have a range of +1 to -1. If two prices move with together exactly, the correlation will show a +1. If they move exactly inversely, it will be -1. A random relationship is considered if the correlation is 0.

We took a look at different time periods and found that the correlation of the Euro and the S&P 500 index is getting closer and closer the closer we get toward today. In other words, the +.63 correlation is significant more recently. This shows that the relationship of the two are tight and the question that it raises is: Why?

There are several possible answers that we have explored previously. But the most logical are:

  • Risk off and risk on trading
  • Euro weakness signals fear of Europe debt crisis intensifying
  • Carry-trades unwinding
  • Macro fund sector rotation

No matter what the reason, this is something to watch as for now one or the other is pushing /pulling with a high degree of correlation.


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