[LFX]

The risk on/risk off theme that has so dominated FX markets for the last year is continuing to dissipate. At the peak of the financial crisis a year ago, of 45 possible crosses in G10 FX space, only four were trading independently of equity prices (measured by the three month daily % change correlation). A month ago, there were 12 currency pairs in the “risk neutral window” and there are now 15. FX markets are normalising rapidly and factors that have barely mattered at all for the last year – rate expectations in particular – are returning to the fore as determinants of FX returns. AUD’s extraordinary rally this week after the RBA pulled the trigger on the first hike one month earlier than expected is further testament to this. Note also that the stock-neutral currency pairs mentioned above are dominated by likely early-cycle hikers – AUD, NZD, NOK, CAD.