`Risk On-Risk Off' to Remain Key to Currency Markets for Months, HSBC Says

Correlations between currencies and other asset classes will remain high during the current financial crisis and may never return to levels seen in the mid-2000s, according to HSBC Holdings Plc.

“A weakening of the ‘risk on-risk off’ paradigm is likely only once macro conditions are improved in a sustainable way, implying the paradigm will continue to dominate the market for some considerable time,” currency strategists led byDavid Bloom in London wrote in a research report yesterday.

“Even when the paradigm fades, it would be wrong to expect correlations to fall back to pre-crisis levels given their long- term upward trend,” they said. “Currency performance will likely be tied to the ebb and flow of the perception of risk for some months to come.”

The 120-day negative correlation between IntercontinentalExchange Inc.’s Dollar Index and the Standard & Poor’s 500 Index was at 42.4 percent today, and has been mostly above 40 percent since June 2009, according to data compiled by Bloomberg.

To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net

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