Is the Canadian Dollar Signaling Higher US Equities

Over the last few months, much has been made about the correlation between the movements in the Canadian Dollar and the equities markets in the US. It is not hard to see why investors are talking about it when you see charts like this.

Although this correlation is fairly (I calculate a correlation of 64% on price and 62% using daily changes), I think you should remember the other side of the value of the Canadian Dollar, namely the US dollar. I think this apparent relationship is capturing changes in risk preferences and the changes in the value of the US dollar. As evidence, I changed the base rate of the Canadian Dollar cross rate to Australian Dollar. If the intrinsic value of Canadian Dollar was somehow correlated with the US equity markets, changing the base reference should not change this relationship. Here is the chart of the Canadian Dollar/Aussie Dollar cross versus the S&P 500. See the correlation? I don't.

I think the above correlation is more of the artifact of the risk/risk off trade that has manifested itself in the value of the US dollar and other currencies. It is probably more appropriate to watch the trading in the US dollar to gauge the risk temperament of traders for US assets.