Forex Correlations:
Forex market correlations to the S&P 500 and broader ‘risk’ sentiment have shrunken significantly through recent trade, but the Australian Dollar’s link to Gold prices continues to trade near record-highs.
The correlation between the AUDUSD and Gold has wavered at times and has never truly meant that the two move in tandem on a tick-for-tick basis. Yet it seems that traders looking to take advantage of secular shifts in gold price trends could potentially do so through the Australian Dollar.
We can see another important, if untraditional, correlation between the S&P 500 and the US Dollar/Canadian Dollar currency pair. The USDCAD has historically had a much stronger link to crude oil futures prices, but the recent shift towards trading with the S&P underlines the fact that the currency is highly connected to financial market risk sentiment. Any substantial deterioration in equity prices would likely lead to considerable Canadian Dollar weakness.
Forex Correlations Summary
Forex correlations against Oil, Gold, and the Dow Jones Industrial Average for the past 30 calendar days:
Strongest Forex Correlations
Australian Dollar/US Dollar and Gold Prices
The Australian Dollar’s correlation to gold prices has recovered noticeably through recent trade, as both the precious commodity price and Aussie currency have fallen considerably from previous highs. And though we cannot expect the highly volatile AUDUSD pair to match gold’s moves on a tick-per-tick basis, it seems relatively clear that said prices will tend to follow the same trends over the same stretch. Given their historically strong link, the AUDUSD seems a good proxy to trade secular shifts in gold market trends.
US Dollar/Canadian Dollar and the US S&P 500
The high-flying Canadian Dollar remains quite closely correlated with the US S&P 500 and broader ‘risk’ sentiment—a somewhat unusual but important factor to note if trading the USDCAD. Correlations never imply causality. That is, a drop in the S&P will not necessarily lead to a rally in the USDCAD. Yet the fact that the two seemingly unrelated asset classes have moved in virtual tandem underlines that the Canadian Dollar remains highly correlated to financial market risk sentiment. Loonie bulls should keep a close eye on high-flying stock market prices, as any significant corrections would likely coincide with a similarly sharp upward move in the USDCAD.
Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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