Liquidity Rolling Correlations Analysis

Understanding Rolling Correlations with Global Liquidity

What are Rolling Correlations?

Rolling correlations measure the strength and direction of the relationship between two variables over a moving time window. In this analysis, we use a 120-day (approximately 4-month) rolling window to calculate how closely Bitcoin, Gold, and the S&P 500 move with Global Liquidity.

The correlation coefficient ranges from -1 to +1:

• +1.0: Perfect positive correlation - assets move together in lockstep
• +0.5 to +1.0: Strong positive correlation - assets generally move in the same direction
• 0 to +0.5: Weak positive correlation - some tendency to move together
• -0.5 to 0: Weak negative correlation - some tendency to move in opposite directions
• -1.0 to -0.5: Strong negative correlation - assets generally move in opposite directions
• -1.0: Perfect negative correlation - assets always move in opposite directions

Why Focus on BTC, Gold, and SPX?

These three assets represent different categories of investment that respond to liquidity conditions:

• Bitcoin (BTC): A digital asset often viewed as both a risk asset and alternative store of value. Its correlation with liquidity can indicate whether it's behaving more like a risk-on or risk-off asset.
• Gold (GOLD): A traditional safe-haven asset and store of value. Gold's correlation with liquidity reveals how conventional hedges respond to monetary expansion or contraction.
• S&P 500 (SPX): A broad U.S. equity index representing the stock market. The SPX correlation shows how risk assets respond to changes in global liquidity conditions.

What is Global Liquidity?

Global Liquidity represents the amount of liquid capital available in the financial system, primarily influenced by central bank balance sheets, money supply, and credit availability. When global liquidity expands (due to quantitative easing, lower interest rates, or increased credit), more capital is available to flow into various asset classes. Conversely, when liquidity contracts (due to quantitative tightening, higher rates, or credit restrictions), capital becomes scarcer.

How to Use This Indicator

Monitor the correlation trends to understand asset behavior:

• Rising correlations: When an asset's correlation with liquidity increases, it suggests the asset is becoming more sensitive to liquidity conditions. High positive correlations mean the asset is likely to rise when liquidity expands and fall when it contracts.
• Falling correlations: Decreasing correlations suggest the asset is decoupling from liquidity conditions and may be driven more by asset-specific factors.
• Negative correlations: When correlations turn negative, the asset tends to move inversely to liquidity - rising when liquidity contracts and falling when it expands. This can indicate safe-haven behavior or other defensive characteristics.
• Diverging correlations: When BTC, Gold, and SPX show different correlation patterns, it reveals how different asset classes are responding to the same liquidity environment, providing insights into market regime changes.

Signal Interpretation

Use the correlation patterns to inform your market perspective:

• High BTC-Liquidity correlation: Bitcoin is trading as a liquidity-sensitive risk asset. Expect BTC to benefit from liquidity expansion and suffer during liquidity contractions.
• High Gold-Liquidity correlation: Gold is responding positively to monetary expansion, possibly due to inflation concerns or currency debasement fears.
• High SPX-Liquidity correlation: Equity markets are being driven primarily by liquidity conditions rather than fundamentals, suggesting a liquidity-driven market regime.
• All three highly correlated: When BTC, Gold, and SPX all show high positive correlations with liquidity, it indicates a strong liquidity-driven market where "all boats rise with the tide."
• Diverging correlations: When correlations diverge significantly, it suggests a market transition or regime change where different assets are responding to different drivers.