Forex trading markets continue to follow movements in oil, gold, and major equity indices. We have seen the US dollar move almost lock-step with crude oil futures, and it is subsequently unsurprising to note that the Euro/US Dollar’s trading-year correlation to NYMEX Crude Futures is at its highest since the inception of the euro. Such dynamics suggest that we may have to watch outlook for gold, oil, and other key futures prices to gauge the likely direction of the US dollar against key counterparts.
Forex Correlations Summary:
Forex correlations against Oil, Gold, and the Dow Jones Industrials Average for the past 20 trading days:
Forex trading markets continue to follow movements in oil, gold, and major equity indices. We have seen the US dollar move almost lock-step with crude oil futures, and it is subsequently unsurprising to note that the Euro/US Dollar’s trading-year correlation to NYMEX Crude Futures is at its highest since the inception of the euro. Such dynamics suggest that we may have to watch outlook for gold, oil, and other key futures prices to gauge the likely direction of the US dollar against key counterparts.
In terms of weakening correlations, it is interesting to note that the Australian dollar has virtually stopped tracking movements in the US Dow Jones Industrials Average. Given that the broader G10 Carry Trade has recently picked up its correlation to the DJIA, the fact that the AUDUSD is largely moving independent of the key risk barometer suggests that there are other more important movers of Australian Dollar volatility. Namely, we have seen interest rate outlook take center stage in forcing AUD moves, and the coming week’s critical Reserve Bank of Australia rate announcement will almost certainly drive sharp price movements in AUD pairs.
Strong Forex Correlations
Euro/US Dollar and Oil Futures
The correlation between the EURUSD and NYMEX Crude Oil futures has recently hit its highest levels since the inception of the euro—underlining the importance of commodity prices in determining the trajectory of the US dollar. It seems that the relationship between oil and the US dollar remains stable, and we would argue that it will be important to watch for any significant price moves in oil while trading the US dollar and vice-versa.
Australian dollar and Reuters/Jefferies CRB Index
The relationship between the Australian dollar and commodity prices has never been stronger; a rolling 1-year correlation between the AUDUSD and Reuters/Jefferies CRB Index now trades at its highest since the Aussie became a free-floating currency in 1984. As is the case for the EURUSD, the fact that the US dollar is moving almost lock-step with oil futures explains a good deal of this dynamic. AUDUSD outlook will largely depend on outlook for key commodities.
Forex Carry Trade Basket and the US Dow Jones Industrials Average
In our last correlations report we argued that the G10 Carry Trade was largely losing its correlation to the Dow Jones Industrial Average and other risky asset classes. Yet recent price action has reaffirmed that Carry Trade outlook continues to depend on the trajectory for the DJIA and broader stock markets. One notable exception is the Australian dollar.
Weak Forex Correlations:
Australian Dollar and the Dow Jones Industrials Average
After setting record-highs through late-2007, year-long correlation between the AUDUSD and Dow Jones Industrials Average has turned significantly lower. It seems that the Australian dollar has proven far more sensitive to movements in commodity prices and, more recently, interest rate outlook. Indeed, the AUDUSD has recently tumbled on forecasts that the Reserve Bank of Australia will cut interest rates at its upcoming meeting. The event will likely cause significant price moves in the AUDUSD regardless of outcome, and traders should carefully monitor any especially significant shifts in rhetoric from the Australian monetary policy authority.
Written by David Rodriguez, Quantitative Analyst for DailyFX.com
We always want to hear your feedback on new DailyFX articles. Want more articles like this? Less? What do you want to see? Send e-mails to drodriguez@dailyfx.com .
Forex Correlations Signal Euro/US Dollar Outlook to Depend on Oil Prices
Linear Mode
