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Australian Dollar Offers Proxy to Gold, Japanese Yen to US Treasuries

By , Quantitative Strategist
20 February 2012 21:30 GMT

The Japanese Yen continues to tumble against the US Dollar, and overall US Treasury Yield outlook points to further strength. All the while, the Australian Dollar represents an attractive proxy to positions in Gold.

Given that the Aussie Dollar offers significant yield advantages against its namesake US counterpart, a long AUDUSD looks attractive in lieu of long-GLD positions themselves. We could likewise voice our US yield-bullish view via the US Dollar/Japanese Yen currency pair versus taking a short-bond position.

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

-0.33

0.01

-0.75

0.46

0.18

0.17

-0.42

1 Month

0.36

0.29

-0.35

0.50

-0.14

0.40

-0.59

3 Month

0.53

0.48

-0.25

0.66

-0.51

0.66

-0.63

1 Year

0.14

0.21

-0.10

0.25

-0.20

0.21

-0.26

USO

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

-0.50

-0.15

-0.22

-0.09

0.52

0.10

-0.07

1 Month

0.29

0.02

0.29

0.38

-0.43

0.23

-0.26

3 Month

0.36

0.35

0.04

0.56

-0.53

0.52

-0.44

1 Year

0.46

0.36

0.02

0.59

-0.56

0.48

-0.51

DIA

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.45

0.55

0.23

0.46

-0.61

0.22

-0.31

1 Month

0.37

0.36

0.35

0.64

-0.72

0.36

-0.36

3 Month

0.60

0.57

-0.11

0.86

-0.82

0.75

-0.71

1 Year

0.64

0.54

-0.05

0.79

-0.81

0.75

-0.70

FTSE100

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.39

0.09

-0.56

0.41

-0.35

0.89

-0.52

1 Month

0.23

0.22

0.10

0.50

-0.60

0.55

-0.28

3 Month

0.46

0.34

-0.08

0.71

-0.67

0.69

-0.53

1 Year

0.45

0.36

0.00

0.69

-0.66

0.63

-0.56

SLV

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.31

0.47

-0.58

0.94

-0.59

0.64

-0.75

1 Month

0.56

0.33

-0.29

0.64

-0.32

0.43

-0.70

3 Month

0.61

0.52

-0.25

0.68

-0.61

0.65

-0.66

1 Year

0.30

0.30

-0.05

0.40

-0.36

0.35

-0.38

Perfect Positive Correlation:

1.00

Perfect Negative Correlation:

-1.00

australian_dollar_us_dollar_japanese_yen_correlations_body_Picture_1.png, Australian Dollar Offers Proxy to Gold, Japanese Yen to US Treasuries

US Dollar/Japanese Yen Exchange Rate (lhs)

US 10-Year Treasury Note Yield (rhs)

Correlation between US Dollar/Japanese Yen and US 10-Year Treasury Note Yield

The US Dollar/Japanese Yen exchange rate has continued to defy expectations as it challenges key technical resistance, threatening to break to fresh highs through upcoming trade. All the while the USDJPY has traded quite closely with the US 10-year Treasury Yield, and indeed it seems as though yields could be near an important bottom as well.

Japanese investors are among the most interest rate-savvy in the world—a by-product of having the lowest interest rates in the industrialized world for as long as most can remember. A sharp jump in US yields would encourage further investments in Treasuries and a commensurate rally in the USDJPY.

It’s hard to claim that one leads the other, as the moves tend to be mostly simultaneous. Yet we see important risks of both a USDJPY bottom and a longer-term bottom in the US 10-year Treasury Yield as well. A long-USDJPY position does not offer any real interest rate return as Japanese and US interest rates are virtually at zero. Yet a short-Treasury bond position (long yield) position would require the investor to pay yields. We would take a long-USDJPY position given the choice.

australian_dollar_us_dollar_japanese_yen_correlations_body_Picture_2.png, Australian Dollar Offers Proxy to Gold, Japanese Yen to US Treasuries

Australian Dollar/US Dollar Exchange Rate (lhs)

SPDR S&P 500 ETF Trust (rhs)

Correlation between Australian Dollar/ Exchange Rate and the SPDR S&P 500 ETF Trust (SPY)

The Australian Dollar remains strongly correlated to precious metals prices, and the classic “commodity bloc” currency offers the distinct advantage of high domestic interest rates. In any leveraged FX position, you pay interest on the currency you sell and receive interest on the currency you buy.

The British Bankers Association’s LIBOR rates show that the Australian Dollar yields a substantial 4.42 percent on 1-week loans. The equivalent US yield stands at a paltry 0.19 percent, and a trader could theoretically collect the spread of 4.23 percent via FX Positions.

In practice, a trader won’t receive the full spread due to transaction costs. Yet the important yield stands in sharp contrast to the carrying costs typically paid on long-Gold positions. Will the Australian Dollar track Gold prices perfectly? No. Yet we see real reason why we would rather be long AUDUSD than GLD or spot gold itself.

--- 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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20 February 2012 21:30 GMT