Being lulled into stable correlations is the trait of a market regime. So whencorrelations change, one should take notice; it could signal a regime change.Indeed, we believe last year marked just such a change. In the earlier “crisis”regime of 2008-12, the dollar was negatively correlated to equities and soviewed as a risk-off currency, developed markets were plagued with crisesfrom Lehmans to the Euro-area, and new frontiers were reached in G3 centralbank policy. The dollar was also extending its downtrend. All that changed in2013. The dollar’s correlation to equities dropped to zero (first chart), emergingmarkets were in crisis and “frontier” monetary policy was being unwound(taper). The new regime will likely be of dollar strength and emerging marketcrises, much like the second half of the 1990s. At the more micro level, theshift in dollar-equity correlation also suggests that a sharp stocks correctionmay not derail the dollar trend.
Read the full report: FX Daily
Deutsche Bank