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Forex: S&P 500 VIX At Lows, AUDUSD Weakness Warns of Breakdown

By , Quantitative Strategist
18 January 2013 16:15 GMT

Summary: The S&P 500 Volatility Index (VIX) trades at 13 percent, but the Australian Dollar has failed to break to resh highs. We see risk of Australian Dollar tumbles.

Correlation between Australian Dollar/US Dollar and S&P 500 Volatility Index

forex_correlations_australian_dollar_body_Picture_1.png, Forex: S&P 500 VIX At Lows, AUDUSD Weakness Warns of Breakdown

Australian Dollar/US Dollar Exchange Rate(lhs)

S&P 500 Volatility Index (rhs)

Correlation between the Australian Dollar/US Dollar Exchange Rate and S&P 500 Volatility Index

The correlation between the Australian Dollar and the US S&P 500 Volatility Index has become less significant, as the AUDUSD has failed to hit fresh highs despite multi-year lows in the VIX.

The Aussie Dollar has long boasted the highest short-term interest rates in the G10—a fact that has made it an attractive currency for yield-seeking speculators. At current interbank lending rates, the AUDUSD offers a 3.02% overnight rate versus a 0.16% equivalent for the US Dollar. In theory a trader could collect a 2.86% annual rate of return by simply going long the AUDUSD.

Yet the clear risk is that the Australian Dollar could fall by more than 2.86% and fully offset yield differentials. It last posted a daily decline greater than that in September, 2011 when the “Fear Index” in the VIX was trading above 40%. Given that the VIX now stands near 13%, shouldn’t the AUDUSD trade higher?

A critical point worth noting is that the Australian Dollar’s yield advantage is falling fast, and in fact it may soon relinquish its title of highest in the G10 to the New Zealand Dollar.

Such a fact helps explain why the Australian Dollar has failed to break to fresh highs despite the fact that few fear major moves in the S&P 500 and broader financial markets. In fact we see evidence that the AUDUSD may soon break lower amidst clear underperformance.

Forex Correlations Summary

View forex correlations to the S&P 500, S&P Volatility Index (VIX), Crude Oil Futures prices, US 2-Year Treasury Yields, and Spot Gold prices.

S&P 500

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.59

0.75

0.70

-0.31

-0.37

-0.67

0.29

1 Month

0.19

0.40

0.39

0.64

-0.80

0.53

-0.28

3 Month

0.30

0.34

0.26

0.56

-0.69

0.57

-0.32

1 Year

0.47

0.50

0.31

0.68

-0.77

0.63

-0.49

Gold

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.00

0.89

0.04

0.12

-0.54

-0.42

-0.25

1 Month

0.24

0.34

0.20

0.36

-0.34

0.30

-0.26

3 Month

0.27

0.32

0.03

0.40

-0.24

0.26

-0.35

1 Year

0.51

0.32

-0.20

0.43

-0.27

0.43

-0.55

Crude Oil

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.84

-0.04

0.67

0.11

-0.30

0.20

0.14

1 Month

0.45

0.37

0.57

0.59

-0.48

0.49

-0.25

3 Month

0.41

0.24

0.23

0.36

-0.28

0.30

-0.26

1 Year

0.47

0.43

0.19

0.55

-0.60

0.51

-0.47

US 2-Year

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.67

0.65

0.82

-0.38

-0.31

-0.63

0.43

1 Month

0.26

0.04

0.41

0.10

-0.31

-0.10

0.07

3 Month

0.20

0.19

0.41

0.11

-0.34

0.06

0.02

1 Year

0.17

0.10

0.43

0.10

-0.26

0.02

0.03

S&P VIX

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.69

0.66

0.55

0.44

-0.84

0.14

-0.21

1 Month

0.03

-0.21

-0.21

-0.44

0.62

-0.45

0.11

3 Month

-0.05

-0.22

-0.14

-0.45

0.54

-0.51

0.20

1 Year

-0.37

-0.43

-0.24

-0.61

0.62

-0.59

0.43

Perfect Positive Correlation:

1.00

Perfect Negative Correlation:

-1.00

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

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18 January 2013 16:15 GMT