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Forex Correlations: Australian Dollar Proxy for S&P 500, Gold, Oil Prices

Forex Correlations: Australian Dollar Proxy for S&P 500, Gold, Oil Prices

2011-05-17 16:23:00
David Rodriguez, Head of Business Development
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The Australian Dollar remains a speculator’s favorite, serving as a highly-correlated and high-yielding proxy to the US S&P 500, Gold, and Crude Oil futures prices.

The Australian Dollar has pulled back from record highs against its US namesake as broader financial markets correct. Yet the antipodean currency remains an attractive investment as its short-term yields are the highest among G10 currency and the US Dollar currently ‘boasts’ record-low interest rates.

As long as US Dollar yields remain near record-lows, we may continue to see cross-market correlations trade near historical strength across a broad range of raw materials prices. This seems particularly true for high-flying Gold and Crude Oil prices as well as the Australian Dollar.

Forex Correlations Summary

Forex correlations against Oil, Gold, and the Dow Jones Industrial Average for the past 30 calendar days:

australian_dollar_gold_forex_correlation_body_Picture_3.png, Forex Correlations: Australian Dollar Proxy for S&P 500, Gold, Oil Prices

Read a guide on understanding the forex correlations summary chart.

Australian Dollar and US S&P 500 Index

australian_dollar_gold_forex_correlation_body_Picture_4.png, Forex Correlations: Australian Dollar Proxy for S&P 500, Gold, Oil Prices

The Australian Dollar’s link to the US S&P 500 currently trades near record-strength, as the high-yielding currency remains strongly correlated to broader risk sentiment. With the highest yield of any G10 currency, the Aussie Dollar is an investment destination of choice for those seeking high returns. A common strategy is to borrow low-yielding currencies such as the US Dollar and Japanese Yen and collect the much stronger yields available in the AUD. Yet this strategy only works if yield differentials are large enough to cover potential exchange rate volatility.

The net result is to leave the Australian Dollar to risk sentiment and broader moves in financial markets. The Aussie$ is subsequently a strong proxy for trading the S&P 500 with the additional benefit of high yields, and positioning data suggests traders have been taking advantage of said dynamic through recent trade.

Australian Dollar and Gold Prices

australian_dollar_gold_forex_correlation_body_Picture_5.png, Forex Correlations: Australian Dollar Proxy for S&P 500, Gold, Oil Prices

The Australian Dollar’s link to gold prices recently trades near record strength, making it difficult to tell an AUDUSD chart apart from the equivalent gold price chart. Fast rallies in both the Aussie currency and precious metals prices have attracted speculative interest across the board. In fact many prefer the AUDUSD to holding spot gold or gold futures due to the fact that the forex position offers the additional benefit of yield differentials.

The Australian Dollar remains inextricably linked to gold prices as speculators have piled into the currency as a high-yielding proxy to bets on gold itself. The level of leverage in both FX and gold futures markets nonetheless leaves both instruments quite sensitive to moves in broader risk sentiment. Though gold has historically been seen and traded as a safe-haven in times of market stress, it has recently sold off in tandem with the S&P 500 and broader ‘risk’. Cross-market correlations remain as strong as ever.

Australian Dollar/US Dollar and NYMEX WTI Crude Oil Prices

australian_dollar_gold_forex_correlation_body_Picture_6.png, Forex Correlations: Australian Dollar Proxy for S&P 500, Gold, Oil Prices

The Australian Dollar’s link to Crude Oil prices has almost literally never been stronger. The ‘Commodity Bloc’ currency previously hit fresh record-highs amidst impressive strength in raw materials prices. And though Gold is typically the more traditional commodity link to the AUD, its short-term correlation is actually equal to that of Crude Oil.

A resumption of US Dollar rallies would keep this link quite strong. Unlike in Gold or Oil markets, there is no carrying cost in holding AUD-long positions. In fact the additional benefit of high interest rates is what makes it a favorite among speculators bullish of commodity markets.

Written by David Rodriguez, Quantitative Strategist for DailyFX.com

To join this author’s distribution list, send an e-mail with subject line “Distribution list” to drodriguez@dailyfx.com .

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