AUD/USD, GBP/USD More Influenced by Equities: Cross Asset Correlation

CAD, AUD, GBP, S&P 500 Analysis & News

• Canadian Dollar Remains Vulnerable
• Currencies Increasingly Influenced by Risk Assets
• Australian Dollar Topping Out, Eyes on Chinese GDP

Canadian Dollar Remains Vulnerable

In our previous note, we had highlighted the most correlated currencies with oil prices ahead of OPEC’s historic oil production cut. In turn, given that the agreement had not only underwhelmed initial expectations, but as the IEA had noted, the size of the production cut was still not enough the fill the near-term demand shock and thus oil prices have continued to head lower with commodity-linked currencies also reversing course, most notably the Canadian Dollar. Risks skewed to the downside against the safe-haven Japanese Yen.

Currencies Increasingly Influenced by Risk Assets

That said, it is worth noting that in recent weeks, risk assets (S&P 500 used as proxy) have been among the dominating factor in dictating cross assets, in particular in FX amid a rising positive correlation. As such, in recent weeks, the pullback in the VIX has coincided with equities rallying significantly off lows, which in turn has benefitted high beta currencies (AUD, NZD, GBP). With this in mind, we remain of the view that risk assets are vulnerable to weak earnings figures and oil prices, while an extension in lockdown measures would lengthen the crisis, which raises the risk of high-beta currencies topping out.

Australian Dollar Topping Out, Eyes on Chinese GDP

This is more so the case for the Australian Dollar, which had been trading at elevated levels of 0.6450. Failure for AUD/USD to hold above 0.6300 risks extending losses in the pair with eyes on the upcoming Chinese Q1 GDP. Alongside this, the Aussie had fallen in tandem with the Kiwi as the RBNZ Governor Orr left the door open to negative interest rates, largely reiterating the central banks recent rhetoric.

High Beta Currencies Remain Heavily Influenced by Risk Assets

Prior Cross-Asset Correlation Reports

Currencies Most Impacted by Oil Prices

Cross-Asset CorrelationMatrix(1 Week, 1 Month & 3 Month Timeframe)

Source: Refinitiv, DailyFX. The Topix is used a proxy for the Nikkei 225.

--- Written by Justin McQueen, Market Analyst

Follow Justin on Twitter @JMcQueenFX