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US Dollar Index Offers Proxy to Dow Jones, Aussie to Copper Prices

US Dollar Index Offers Proxy to Dow Jones, Aussie to Copper Prices

2011-10-18 10:00:00
David Rodriguez, Head of Product
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Forex market correlations to the Dow Jones and broader financial markets continue to trade near records, and currencies have likewise tracked commodity price moves with strong accuracy. Overall, these strong correlations imply that currencies can be traded as reasonable proxies for moves in other markets.

Strong currency correlations suggest that markets will mostly continue to move in tandem. This means that it remains critical to monitor moves in stock market and broader financial market sentiment when trading the US Dollar, Australian Dollar, and other major world currencies.

Forex Correlations Summary

View forex correlations against Oil, Gold, the Dow Jones Industrial Average, and Copper prices across multiple time frames.

Gold

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.92

0.78

0.44

0.84

-0.86

0.83

-0.88

1 Month

0.15

0.08

0.04

0.4

-0.45

0.42

-0.37

3 Month

-0.08

-0.01

-0.16

-0.03

0.00

0.00

-0.03

1 Year

0.07

0.2

-0.19

0.24

-0.15

0.22

-0.24

Oil

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.66

0.28

0.36

0.53

-0.64

0.51

-0.56

1 Month

0.51

0.43

0.31

0.72

-0.76

0.65

-0.72

3 Month

0.39

0.3

-0.01

0.63

-0.6

0.53

-0.54

1 Year

0.36

0.27

-0.02

0.5

-0.5

0.35

-0.43

Dow

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.98

0.71

0.53

0.92

-0.93

0.89

-0.96

1 Month

0.86

0.78

0.4

0.91

-0.88

0.88

-0.92

3 Month

0.72

0.59

-0.13

0.84

-0.84

0.84

-0.77

1 Year

0.57

0.45

0.04

0.71

-0.75

0.66

-0.61

Copper

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.77

0.8

0.75

0.78

-0.86

0.82

-0.66

1 Month

0.45

0.36

0.34

0.62

-0.67

0.62

-0.57

3 Month

0.38

0.31

0.06

0.61

-0.62

0.58

-0.47

1 Year

0.3

0.27

-0.02

0.51

-0.49

0.43

-0.4

forex_correlations_us_dollar_oil_dow_gold_body_Picture_1.png, US Dollar Index Offers Proxy to Dow Jones, Aussie to Copper Prices

Dow Jones FXCM Dollar Index/Dow Jones Industrial Average

The correlation between the Dow Jones FXCM Dollar Index (ticker: USDOLLAR) and the Dow Jones Industrial Average continues to trade near record strength. The safe-haven US currency continues to track moves in financial market sentiment with record accuracy, and it remains important to track broader market moves if trading the Greenback.

As the currency with the third-lowest short-term interest rate of any major global economy, the USD has remained a speculator’s favorite as traders borrow US Dollars to fund investments in higher-yielding assets.

In normal, quiet times, an investor stands to gain if they borrow US Dollars cheaply to buy riskier assets such as the Dow Jones and even other currencies such as the Australian Dollar. Yet when markets grow strongly risk averse and the Dow Jones tumbles, those same traders will often close those same US Dollar-short positions and send the Greenback sharply higher.

Expect the USDOLLAR to continue its fairly recent declines if the Dow Jones continues to recover from previous declines.

forex_correlations_us_dollar_oil_dow_gold_body_Picture_2.png, US Dollar Index Offers Proxy to Dow Jones, Aussie to Copper Prices

US Dollar/Canadian Dollar Currency Pair and the Price of Crude Oil

The Canadian Dollar has recently been trading in virtual lock-step with the price of crude oil, cementing its position in the “commodity bloc” of currencies. On one side of the trade, it seems as though investors have been buying Crude Oil and other hard commodities as a hedge against US Dollar weakness. On the other, the Canadian economy remains a large net-exporter of crude oil and its currency is accordingly sensitive to sharp moves.

We expect the USDCAD to continue acting as a (negatively) correlated proxy to Crude Oil prices.

forex_correlations_us_dollar_oil_dow_gold_body_Picture_3.png, US Dollar Index Offers Proxy to Dow Jones, Aussie to Copper Prices

Australian Dollar/US Dollar Currency Pair versus the Price of Copper

The Australian Dollar’s correlation to commodity prices remains strong across the board, and hard commodities such as copper remain significant in Australian trade. A stalwart of the “commodity bloc” of currencies, the Australian Dollar remains a strong proxy for positions in base metals. Strong growth in China and other Asia-Pacific economies has driven demand for copper and pushed the Australian Dollar higher in kind.

Thus if you believe that such growth will continue, the AUDUSD could continue its overall uptrend. Of course the opposite could likewise be true: a drop in demand for copper and other base metals could push the Australian Dollar lower.

--- 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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