Gold and USD/JPY are trading tick-for-tick
The rule of thumb is that in a volatile market or a crisis, all correlations go to 1. It means that everything moves together.
This is the opposite kind of time. The VIX is at multi-decade lows, the S&P 500 at an all time high and it's tough to even identify a pressing threat to markets.
Yet correlations are tight. What's happening is that markets are drifting together as they search for themes.
A great example right now is USD/JPY and gold. Gold is always correlated with the US dollar because it's priced in US dollars but since the election, the pairs have been a mirror image.
Gold vs USD/JPY (inverted)
In past years there were periodic (and substantial) disconnects whereas in 2017, the chart is virtually identical. At the moment, both are putting the final touches on erasing the March-April moves.
The tighter correlation is borne out in the data. Here's the daily correlation for Jan 1 to May 9 for each of the past 10 years.
- 2017 +0.773
- 2016 +0.524
- 2015 +0.454
- 2014 +0.484
- 2013 -0.156
- 2012 +0.210
- 2011 +0.027
- 2010 +0.053
- 2009 +0.280
- 2008 +0.294
We can see it's much higher than usual. Some of that is because the yen side of the equation isn't much of a factor at the moment with the BOJ on the sidelines.
So let's use the Bloomberg Dollar Index instead (which is a better representation that the DXY). In this case, the dollar should move opposite to gold so a negative-1 correlation would be tightest.
- 2017 -0.646
- 2016 -0.430
- 2015 -0.282
- 2014 -0.390
- 2013 -0.223
- 2012 -0.510
- 2011 -0.264
- 2010 -0.463
- 2009 -0.152
- 2008 -0.649
Again, it shows an extremely high correlation this year compared to the past.
What does it mean?
I believe it shows that markets are sleepwalking. The focus on fundamentals has devolved into intraday trend following. Eventually it will break, but for now the trade is to brush aside asset fundamentals and ride the intraday trend.