Which is the tail and which is the dog? It is a commonplace that many asset classes have developed correlations to each other where none existed before. But while correlation is obvious from looking at a chart, causation is less so. When is the tail wagging the dog?

The S&P 500 has a well-known correlation with the exchange rate between the Japanese yen and the New Zealand dollar. This is thanks to the “carry trade” – borrowing cheaply in yen and parking the funds in higher yielding currencies such as the kiwi. Both US stocks and the carry trade go down when people feel more risk averse.