[ForexNews]

Last week there was some market sentiment that the USD had turned for fundamental reasons, aided by the extended positions in currencies. However, there seems fairly strong indications that the FX moves were being driven by a broader pullback in risk appetite and positioning rather than FX-specific factors. It continues to be the case that currencies and equity markets move broadly together. If investors accept the view that it is more likely in the big picture that equities are driving currencies or that both are driven by broader shifts in risk appetite, it still seems to be the case that risk-appetite is driving currencies.

Overall, the risk trade remains the dominate driver of USD.

Let's see that how in each month the cumulative number of days in which equities and EUR/USD moved in the same direction and the cumulative number in which they moved in opposite directions. No distinguish between whether direction is up or down, as long as the direction is the same.

Since March the number of same direction days overall has been more than three times as large as the number of divergent days. In October the ratio was 17:5, and the last days of the month showed virtual matching between equity market and currency moves. (AUD/JPY would give virtually the same result.)

Correspondence of currencies and equity spreads

By contrast, the correlation of bond yields and currencies has been much more muted. Let's see the corresponding relationship between EUR/USD and 10y US Treasury yields. October showed one of the tighter correlations and it was still the case that higher USD yields were linked in with higher EUR/USD, rather than the opposite. Even in October the correspondence was not as strong as with equities and credit. In prior months it was weaker. Moreover, the conventional expected correlation would be in the opposite direction that higher US yields were associated with a stronger USD. There is very little evidence that there has been any correspondence between US/euro area spreads and EUR/USD.