Forex Correlations: Australian Dollar High-Yield Proxy for Gold Trades

Forex correlations to the S&P 500, Gold, and Oil prices continue to trade near record peaks, and currencies such as the high-flying Australian Dollar offer good proxies for trades in other financial asset classes.

The AUDUSD continues very closely linked to Gold, the S&P 500, and broader hard commodities prices. The fact that the currency likewise offers the highest short-term yield of any G10 currency means that Australian Dollar longs seem more attractive than the equivalent Gold or low-yielding S&P 500 position.

Forex correlations remain strong across the aboard, and this is nowhere more clear than the Japanese Yen. The FX carry trade-linked currency had previously lost its link to broader ‘risk’ as it slowly trended higher against the US Dollar despite S&P 500 gains. FX traders seem once again confident enough to pile into JPY-short positions amidst bullish risk sentiment. Indeed, it seems the JPY carry trade is alive and well through the recent ‘risk’ rally.

Forex Correlations Summary

Forex correlations against Oil, Gold, and the Dow Jones Industrial Average for the past 30 calendar days:

Read a guide on understanding the forex correlations summary chart.

Australian Dollar and Gold Prices

The Australian Dollar remains highly correlated to Gold prices, as both the AUD and precious metal represent attractive bets on and hedges against US Dollar weakness. The Australian Dollar in particular offers the advantage of the highest short-term interest rate of any G10 currency. Given that traders must in effect pay storage/carrying costs on Gold, it seems that the Australian Dollar offers an attractive proxy with which to bet on/hedge against Gold strength.

Australian Dollar and US S&P 500

The Australian Dollar and US S&P 500 Index continue to move on a near tick-for-tick basis. The high-yielding Aussie dollar has attracted significant speculative capital on strong financial market risk appetite, but any sudden shifts in risk sentiment just as easily force noteworthy declines. We saw this quite clearly when the AUDUSD tumbled on dramatic Japanese Nikkei 225 sell-offs. Financial markets remain tense on various sources of geopolitical risk around the world. Traders should keep an eye on financial market risk sentiment and the previously high-flying Australian Dollar.

Australian Dollar and Japanese Yen

The correlation between the Australian Dollar and Japanese Yen has picked up substantially as of late, fueled by risk sentiment-linked advance in the high-yielding AUD and similarly pronounced declines in the Japanese Yen. Indeed, the Japanese Yen itself has seen its correlation to broader financial markets strengthen considerably as traders seem more confident in shorting the JPY against higher-yielding counterparts. We would subsequently expect the JPY to track moves in broader financial market ‘risk’—seen most clearly through the US S&P 500 and other key barometers.

Written by David Rodriguez, Quantitative Strategist for DailyFX.com

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