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Here’s how 3 dollar correlations have fallen apart in 2017

Investors looking at historic correlations to predict the path of the U.S. dollar could get burned, as three such links with other assets, including gold and Treasurys, appeared to have broken down in 2017, wrote George Davis, chief technical strategist at RBC Capital Markets, in a Thursday note.

1. The dollar and U.S. yields

The U.S. dollar usually takes its cues from U.S. Treasurys, but around late October, that relationship seemed to weaken and the correlation fell to 0.45 from 0.56 before, according to the RBC report.

A positive reading of 1.0 would be a perfect correlation, meaning the assets always trade in the same direction.

“The dollar index has diverged with the recent move lower in the U.S. 10-year Treasury yields TMUBMUSD10Y, -0.41% ” Davis said, adding that the current relationship suggests the dollar index should be closer to, or possibly even below 94.

The correlation between the ICE U.S. Dollar Index DXY, +0.09%  and the 2 to 10-year U.S. yield curve has also been out of whack lately, Davis said (see chart below).

RBC Capital Markets, Bloomberg
The link between the dollar index and U.S. 2 to 10-year Treasury yield curve has broken down of late

The index sold off this week, as investor worries over the ability of U.S. lawmakers to deliver tax cuts grew, spurred by differences between House and Senate plans. It last traded at 94.419.

2. The dollar and commodities

The buck is also known to move inversely to commodities. Since August, however, this inverse relationship hasn’t been holding up, Davis said.

Similarly, the jump in oil prices at the beginning of this week saw a somewhat sluggish response among commodity-linked currencies—which doesn’t include the dollar—suggesting that the oil-currency connection could be weakening.


RBC Capital Markets, Bloomberg
The inverse relationship between the dollar index and the Bloomberg Commodity Index has weakened since the summer.

3.Dollar/yen and the Nikkei

Among specific currency pairs, dollar-yen USDJPY, -0.08%  and the Japanese Nikkei stock index NIK, -1.32% tend to move in line with each other. But this year, they seem to have fallen out of their rhythm, wrote Davis.

Given that, it might be “time for the Nikkei to reconverge with” the currency pair, Davis said. “Potential exhaustion in the Nikkei may weigh on the dollar-yen,” he said.

The pair hovered around the ¥114 mark over past weeks, where it seemed to find some resistance, and has since fallen as the greenback struggled with tax policy worries this week.

RBC Capital Markets, Bloomberg
The dollar-Japanese yen pair has decoupled this year, and rekindling their link could put pressure on the currency pair.

Correlation intact: gold

Davis does note, however, that the negative correlation between the metal and the greenback—if gold moves higher, the dollar turns lower and vice versa—has remained intact this year.

Moreover, gold could be “on the verge of a bullish breakout, which implies downside risks for the dollar index,” Davis wrote.

Gold GCZ7, +0.24%  last traded at $1,276, compared with RBC’s one to three-month target of $1325. If it got that high, the dollar index could feel some pressure.

RBC Capital Markets, Bloomberg
The relationship between the dollar index and gold has held up this year.
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