S&P 500 and USD, an inverse relationship – HSBC


As the S&P 500 Index falls, the USD rallies and as the S&P 500 Index recovers, the USD sells off. This is due to Risk On-Risk Off (RORO) behaviour rather than a USD bull or bear market, in the opinion of economists at HSBC, who believes the aussie and the kiwi will perform well thanks to its fiscal advantage.

Key quotes

“G10 currencies have behaved exactly as ‘Risk On-Risk Off’ (RORO) suggests: Risk-on currencies have recovered significant losses against the USD in the risk-on period, but they depreciate against the USD in the risk-off period. In our view, this is simply RORO playing out, rather than an idiosyncratic USD bull or bear market.”

“From the start of the year to its year-to-date low on 23 March, the S&P 500 Index fell c1,000 points amid the COVID-19 pandemic and market turmoil. This was the result of acute risk-off sentiment across financial markets, and FX was no exception to this phenomenon. We subsequently saw G10 FX behave in classic RORO fashion, with risk-on currencies (such as the AUD and NZD) depreciating markedly against the USD, and risk-off currencies (such as the CHF and JPY) less so.”

“The S&P 500 had recovered its losses – c1,000 points of them – when it reached its recent high on 8 June. G10 currencies again behaved in RORO fashion. Risk-on currencies surged against the USD, and the outperformance of the JPY and CHF faded.”

“Those with more fiscal room may see their economies recover faster than those with larger debt overhangs allowing their currencies to outperform. As a result, our preferences in the medium-term remain those currencies where fiscal firepower is less constrained: i.e., the AUD and NZD. Meanwhile, we see downside risks for the EUR, GBP and CAD, given their more challenging debt-to-GDP profiles.”

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