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S&P 500 at Fresh Multi-Year Highs, Australian Dollar Targets Same

By , Quantitative Strategist
13 March 2012 22:00 GMT

The US S&P 500 has thus far rallied 11.5% year-to-date, while the Australian Dollar has returned approximately 4% against the US Dollar inclusive of interest rate returns. An exceedingly low S&P 500 Volatility Index (VIX) shows that traders are little worried of a major sell-off. If markets remain so complacent, we expect the highly-correlated Australian Dollar to continue to fresh peaks against its US namesake.

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

0.47

0.19

0.41

0.48

-0.61

0.51

-0.22

1 Month

0.41

-0.03

-0.13

0.20

0.06

0.18

-0.31

3 Month

0.42

0.24

-0.21

0.48

-0.19

0.43

-0.48

1 Year

0.17

0.19

-0.10

0.25

-0.19

0.22

-0.27

USO

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.25

0.50

0.82

0.77

-0.86

0.79

-0.22

1 Month

0.32

0.45

0.25

0.31

-0.33

0.44

-0.34

3 Month

0.37

0.37

0.15

0.50

-0.51

0.49

-0.39

1 Year

0.49

0.39

0.04

0.63

-0.60

0.54

-0.53

DIA

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.24

0.72

0.77

0.75

-0.78

0.76

-0.36

1 Month

0.30

0.49

0.34

0.52

-0.56

0.51

-0.34

3 Month

0.42

0.48

0.13

0.68

-0.66

0.54

-0.51

1 Year

0.63

0.54

-0.04

0.80

-0.81

0.75

-0.69

FTSE100

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.39

0.71

0.84

0.83

-0.90

0.85

-0.40

1 Month

0.40

0.45

0.24

0.64

-0.65

0.74

-0.46

3 Month

0.40

0.34

0.06

0.61

-0.63

0.60

-0.45

1 Year

0.46

0.37

0.01

0.70

-0.67

0.64

-0.57

SLV

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.37

0.37

0.69

0.68

-0.80

0.71

-0.22

1 Month

0.51

0.23

-0.15

0.43

-0.25

0.41

-0.51

3 Month

0.55

0.43

-0.19

0.64

-0.44

0.57

-0.63

1 Year

0.32

0.29

-0.05

0.41

-0.36

0.37

-0.40

Perfect Positive Correlation:

1.00

Perfect Negative Correlation:

-1.00

forex_correlations_s_and_p_500_australian_dollar_highs_body_Picture_1.png, S&P 500 at Fresh Multi-Year Highs, Australian Dollar Targets Same

Australian Dollar/US Dollar Exchange Rate (lhs)

Inverse of the US S&P 500 Volatility Index (VIX) (rhs)

Correlation between Australian Dollar and Inverse of US S&P 500 Volatility index (VIX)

The S&P 500 Volatility Index (VIX) now trades at its lowest levels since 2007 as the S&P 500 Index itself hits fresh multi-year highs. The VIX is often called the “Fear Index” as it largely reflects the price that investors are willing to pay for bets on and hedges against major S&P 500 moves. Thus an extremely low VIX tells us that investors “fear” little risk of a sharp sell-off.

Given that the S&P 500 seems to set fresh multi-year highs on a near-daily basis, few are willing to pay significant sums for hedges against sell-offs. Complacency has fed into the currency world for one simple reason: yield.

The Australian Dollar boasts the highest interest rate of any G10 currency, while the US Dollar is near the lowest. If investors are feeling confident and looking for the highest returns, they can buy the Aussie Dollar against its US namesake and collect a fairly significant yield differential. Of course, a sharp AUDUSD sell-off would quickly offset yields and explains why the Aussie Dollar could fall sharply if the highly correlated S&P 500 tumbled.

We expect that the AUDUSD may continue to fresh highs as investors plow head-long into the S&P 500 and other speculative investments. Given that the VIX remains below an almost-unthinkable 15% (annualized figure) and the S&P 500 itself is up 11% year-to-date (an obscene 71.5% annualized rate of return), outlook remains bullish for stocks and the Australian Dollar.

--- 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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13 March 2012 22:00 GMT