The Australian dollar has held its historic correlation to the price of gold. On the one hand, you have the US dollar’s clear relationship to broader commodity prices. On the other, it is fairly clear that the highly metals-price dependent trade of the Australian economy should affect the domestic currency. Such relationships suggest that outlook for the Australian dollar may very well depend on gold prices as well as the usual host of factors.
Forex Correlations Summary
Forex correlations against Oil, Gold, and the Dow Jones Industrials Average for the past 30 trading days:
Major moves in commodity markets have unsurprisingly made currencies especially sensitive to movements in crude oil and gold futures. It is subsequently easy to see that some of our strongest short-term correlations go to the relationship between gold, crude, and commodity currencies such as the Australian and Canadian dollars. Of course, this largely has to do with the fact that the US dollar itself has grown especially sensitive to moves in dollar-denominated commodity futures (and vice versa). 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.
On the other end of the spectrum, we see that historically risk-sensitive currencies have somewhat lost their correlation to major world equity markets. Such dynamics suggest that the infamous forex carry trade has grown largely independent of the trajectory for the Dow Jones Industrials Average and other key risk barometers.
Strongest Correlations
[B]Swiss Franc and Gold Futures[/B]
The US Dollar/Swiss Franc has shown an increasingly intense correlation to gold prices, as the dollar has unsurprisingly held on to its relationship to what has historically been seen as a dollar hedge. It is interesting to note that the CHF’s correlation is equal to that of the Australian Dollar—suggesting that traders may have reverted to trading the Swiss Franc off of gold prices.
[B]Australian dollar and Gold Futures[/B]
The Australian dollar has held its historic correlation to the price of gold. On the one hand, you have the US dollar’s clear relationship to broader commodity prices. On the other, it is fairly clear that the highly metals-price dependent trade of the Australian economy should affect the domestic currency. Such relationships suggest that outlook for the Australian dollar may very well depend on gold prices as well as the usual host of factors.
[B]Canadian Dollar and Reuters/Jefferies CRB Index[/B][B]
[/B]After spending much of 2007 largely uncorrelated to commodity prices, the Canadian dollar is now showing its true colors in moving in tandem with the widely-followed Reuters/Jefferies CRB Commodity Price Index. Continued declines in oil prices and other key commodities bode poorly for the historically crude oil price sensitive currency. We can only expect such trends to continue through the near term. [B][/B]
Weakest Correlations
[B]Japanese Yen and Dow Jones[/B]
After setting record-highs through late-2007, year-long correlation between the USDJPY and the US Dow Jones Industrials Average has done nothing but head lower. Such dynamics suggest that the initial wave of equity market sell-offs resulted in a broad unwind of Japanese Yen shorts, and markets have subsequently run out of steam in sending the USDJPY lower in response to drops in the DJIA. Given that the Australian Dollar and other key carry currencies remain highly correlated to commodity prices, it may be much more significant to watch commodity price outlook to gauge the likely direction of carry trades.
[B]Dow Jones Industrials Average and the G10 Carry Trade[/B]
For much the same reasons that we see that the Japanese Yen has virtually lost its long-term correlation to stock markets, we see that the G10 carry trade index has seen a precipitous drop in the strength of its relationship with the DJIA. One of the biggest reasons for this is the fact that the US dollar now forms part of the funding-currency base. Yet such dynamics suggest that our typical equity market risk measures will do us little good in predicting movements for the G10 Carry Trade.
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 [email protected] .