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The Changing Nature Of The Link Between Stocks And Exchange Rates

The relative performance of European Equity indexes against their U.S. counterparts has disconnected from the EUR/USD recently. The chart below shows that since the Great Recession, European stock returns were behaving like returns of EM stocks: they were not FX-hedged. Said differently, a (rare) outperformance of European stocks would come along with a stronger Euro and conversely.

Things have changed recently. The outperformance of the EuroStoxx 50 against the S&P 500 (same story for the Stoxx 600) has been accompanied by a fall in the EUR/USD. If the relationship had held, the S&P 500 would clearly have stood as the winner.

Is anything the matter here? Not really. If we take a longer view, the positive relationship between relative returns and the EUR/USD looks more like an oddity than a structural correlation.

The chart above clearly shows that throughout the 1990's and 2000's, the correlation was negative which means that… Read More …