Analysts at Goldman Sachs explain that Equity/FX correlations have varied materially over time and across markets - in the UK and Japan, they are very negative currently and below their long-term average, for the euro area they are more positive than normal.
“EM equities had a consistently positive correlation with EM FX on average and this has been more extreme in the past few months. There are several drivers of the relationship between equities and FX, both cyclical and structural.”
“Negative equity/FX correlations sound intuitive on a ﬁrst look due to the structural trend of increasing international exposure for a lot equity markets. A strengthening of the domestic currency, all else equal, can weaken the competitiveness of exporters and drive FX translation losses on international revenues/proﬁts and vice versa. For example the STOXX Europe 600 has c.47% of sales outside of Europe and the FTSE 100, as an even more extreme example, has more than 69% from outside the UK. This could also explain that the S&P 500 historically had little correlation with the dollar given limited international exposure compared with Europe and Japan. However, that alone cannot explain the strongly negative equity/FX correlations in recent years we ﬁnd the actual impact on earnings in Europe and Japan from FX is not as large also due to currency hedging and costs being more international.”
“Also, that does not explain the variation in equity/FX correlations - for example recently correlation of European equities with the euro has turned positive again despite the high international exposure. Time-varying equity/FX correlations are often the result of the changing ‘risk on, risk off’ nature of the FX - with equities being a very ‘risk on’ asset, the ‘risk on, risk off’ nature of FX will matter a lot for their relationship with equities. During the euro area crisis in 2011/12, the euro traded very ‘risk on’ and as a result the EURO STOXX 50 was highly correlated with the EUR/US$ and the trade-weighted EUR.”