The Emergence of a Negative Correlation between German Equities and the Euro
Before 2011, the euro1 appeared to be positively correlated to German equity2 movements. Since then, however, the positive correlations have started to decrease and trend lower . While the eurozone has recently exited recessionary territory, driven by improvements in Germany and a few peripheral countries, ongoing austerity measures and countries seeking access to programs could continue to present small challenges to the overall outlook for growth in the eurozone. This could add to uncertainty, first and foremost, in the euro’s trajectory.
A look at the overall picture of the euro’s exchange rate plotted against movements to German equities shows a divergence in many areas. This divergence can be referred to as a negative correlation of equities and currency, and such periods of negative correlation are some of the most important times to consider currency hedging.