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Australian Dollar Strongly Correlated to Gold, Silver, Steel Prices

By , Quantitative Strategist
31 January 2012 16:00 GMT

The short-term correlations between the Australian Dollar/US Dollar exchange rate against gold and silver prices trade near record strength. Long positions in the Australian Dollar against the US Dollar (ticker: USDOLLAR) likewise offer the advantage of interest rate payments. This stands in contrast to holding long positions in Gold, Silver, Crude Oil and other commodities; there are carrying costs with buying.

The Australian Dollar will likely remain a speculator’s favorite as a strong proxy for Gold, Silver, and broader metals prices through upcoming forex trading.

Forex Correlations Summary

View forex correlations to the SPDR Gold ETF Trust (GLD), United States Oil Fund ETF (USO), SPDR Dow Jones Industrial Average ETF Trust (DIA), UK FTSE 100 Index, and IShares Silver Trust ETF (SLV) prices.

GLD

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.62

0.03

-0.18

0.80

-0.65

0.34

-0.76

1 Month

0.39

0.24

-0.18

0.69

-0.44

0.44

-0.56

3 Month

0.53

0.52

-0.25

0.69

-0.60

0.67

-0.63

1 Year

0.14

0.21

-0.10

0.25

-0.19

0.21

-0.26

USO

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.55

0.25

-0.12

0.96

-0.88

0.64

-0.79

1 Month

0.34

0.34

-0.10

0.56

-0.56

0.61

-0.45

3 Month

0.35

0.33

-0.11

0.52

-0.52

0.46

-0.44

1 Year

0.46

0.36

0.00

0.59

-0.54

0.47

-0.51

DIA

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.08

-0.01

0.31

0.68

-0.85

0.29

-0.30

1 Month

0.43

0.55

0.09

0.68

-0.53

0.45

-0.54

3 Month

0.68

0.66

-0.25

0.88

-0.84

0.76

-0.79

1 Year

0.63

0.53

-0.06

0.79

-0.81

0.74

-0.70

FTSE100

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

-0.07

0.45

0.08

0.43

-0.54

0.70

-0.12

1 Month

0.39

0.41

-0.03

0.59

-0.55

0.60

-0.45

3 Month

0.50

0.44

-0.16

0.76

-0.69

0.72

-0.61

1 Year

0.45

0.35

-0.01

0.69

-0.65

0.62

-0.56

SLV

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.71

0.12

-0.12

0.81

-0.62

0.38

-0.79

1 Month

0.49

0.55

-0.15

0.77

-0.54

0.57

-0.68

3 Month

0.59

0.51

-0.27

0.68

-0.64

0.63

-0.64

1 Year

0.29

0.30

-0.05

0.40

-0.35

0.35

-0.38

Perfect Positive Correlation:

1.00

Perfect Negative Correlation:

-1.00

forex_correlations_australian_dollar_gold_silver_steel_body_Picture_1.png, Australian Dollar Strongly Correlated to Gold, Silver, Steel Prices

Australian Dollar/US Dollar Exchange Rate (lhs)

SPDR Gold Trust (rhs)

Correlation between Australian Dollar/US Dollar versus SPDR Gold Trust

The Australian Dollar remains very strongly correlated to precious metals prices, and the very short-term link between the AUDUSD and the SPDR Gold Trust (GLD) trades near records. Fundamentally, this makes sense: gold is a top Australian export and its elevated price means that the total value of exports has risen accordingly.

Viewed in this light, the AUDUSD seems an attractive proxy to holding positions in gold. Whereas there is a carrying cost associated with holding long positions in Gold, long Australian Dollar/US Dollar positions will actually produce net interest payments.

The clear caveat is that any sharp sell-offs in the S&P 500 would likely break the AUDUSD’s short-term link to Gold prices, but the S&P 500 Volatility Index (VIX) currently show the lowest volatility expectations since July. Slow stock market moves pose little risk to the AUDUSD-GLD correlation.

forex_correlations_australian_dollar_gold_silver_steel_body_Picture_2.png, Australian Dollar Strongly Correlated to Gold, Silver, Steel Prices

Australian Dollar/US Dollar Exchange Rate (lhs)

Market Vectors Steel Index Fund (SLX) (rhs)

Correlation between Australian Dollar/ Exchange Rate and iShares Silver Trust (SLV)

The Australian Dollar remains a top choice for those looking to speculate on the direction of broader commodity prices and for good reason. The correlation between the AUDUSD and industrial metals likewise remains very strong, seen primarily through instruments such as the Market Vectors Steel Index Fund (SLX, pictured above) and iShares Silver Trust (SLV).

We see that the Aussie Dollar remains a strong proxy for speculative positions and hedges in metals prices. The fundamental reasoning is sound: Australia exports a substantial amount of both precious and industrial metals in both volume and monetary value. The fact that long-AUDUSD positions likewise offer net interest rate payments make them especially attractive; those holding Silver and other metals most often incur carrying costs.

The Australian Dollar should continue to appreciate if Gold, Silver, and broader metals prices remain elevated.

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

To contact David, e-mail drodriguez@dailyfx.com

To be added to David’s e-mail distribution list for this and other reports, e-mail subject line “Distribution List” to drodriguez@dailyfx.com

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31 January 2012 16:00 GMT