Top G10 FX Correlations
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GBP correlations with nominal rate differentials dominate the top 10 positive correlations in the past month, while GBP reactions to risk sentiment appear to be waning. With the BoE’s policy rate at 25bps, another cut to the policy rate in November would trigger the zero lower bound. In this situation, while it is possible that GBP begins to react more to the longer end of the curve if 2y rate vol diminishes, unless the BoE changes its view on the lower bound, GBP downside movements induced by lower UK rates may be more limited going forward.
A similar pattern can be seen with USDJPY, where correlations to nominal rate differentials (2y, 5y, and 10y) now dominate the correlation with the performance of the Nikkei index. Indeed, the correlation between USDJPY and Nikkei has now dropped out of the top 10 list (currently at around 67%), continuing its decline from a high of around 80% in July.
On the flip side, EURJPY correlations with various stock market indices (Nikkei and Hang Seng) have entered the list of top correlations this week.
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