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There has been talk this year, notably by Boris Schlossberg of DailyFX.com, about how the Dow and the EUR/JPY have some amount of correlation between them -- meaning, that movement in one is somehow correlated to movement in another. Tonight I have been sitting in a hotel room in Vegas and, because I am a currency nerd, I decided to find out for myself if what Boris said is true.

I gathered data from Tradestation and from Yahoo! Finance, and with a bit of help from Ken Fisher, whose new book I am enjoying immensely, I did the analysis. It was quite easy using MS Excel.

Okay, let's get to the conclusion and then I can tell you what I did.

For 2007, it seems that the Dow and the EUR/JPY have a Correlation Coefficient of 83%. That's quite a number. Here's a chart to show the results graphically, and then we'll get even deeper into it (you can click on the image below to make it larger):

Thanks to I. Hills, a student, who did the graph.

Here's the spreadsheet. I simply took the data, and cleaned it up a bit to reflect that the Dow and the EUR/JPY did not always trade on the same day (remember fx trades one day extra per week). Then I ran the formulas.

Just because the two are correlated does not mean that there is a causal link -- in other words, that movement in the Dow causes movement in the EUR/JPY. But I do find it interesting that the Dow is correlated to the EUR/JPY. I want to do this for Oil and the CAD, which obviously has already been done but I want to see it for myself.

More on what the numbers mean:

Correlation Coefficient (from Wikipedia): "The conventional dictum that "correlation does not imply causation " means that correlation cannot be validly used to infer a causal relationship between the variables. This dictum should not be taken to mean that correlations cannot indicate causal relations. However, the causes underlying the correlation, if any, may be indirect and unknown. Consequently, establishing a correlation between two variables is not a sufficient condition to establish a causal relationship (in either direction)."

R SQUARED (From Investopedia): "A statistical measure that represents the percentage of a fund or security's movements that can be explained by movements in a benchmark index. For fixed-income securities, the benchmark is the T-bill. For equities, the benchmark is the S&P 500." Ken Fisher sums it up better when he says that this number helps you to be able to say what percent of one variable's movement you can blame on the other variable. That this number is 70% for 2007 on the DOW-EURJPY is quite interesting.