Currencies | Jan 21 2011
By David Rodriguez, Quantitative Strategist, DailyFX
Forex Correlations:
Forex market correlations to the S&P 500 and broader ‘risk’ sentiment have shrunken significantly through recent trade, but the Australian Dollar’s link to Gold prices continues to trade near record-highs.
The correlation between the AUDUSD and Gold has wavered at times and has never truly meant that the two move in tandem on a tick-for-tick basis. Yet it seems that traders looking to take advantage of secular shifts in gold price trends could potentially do so through the Australian Dollar.
We can see another important, if untraditional, correlation between the S&P 500 and the US Dollar/Canadian Dollar currency pair. The USDCAD has historically had a much stronger link to crude oil futures prices, but the recent shift towards trading with the S&P underlines the fact that the currency is highly connected to financial market risk sentiment. Any substantial deterioration in equity prices would likely lead to considerable Canadian Dollar weakness.
Forex Correlations Summary
Forex correlations against Oil, Gold, and the Dow Jones Industrial Average for the past 30 calendar days:
Strongest Forex Correlations
Australian Dollar/US Dollar and Gold Prices
The Australian Dollar’s correlation to gold prices has recovered noticeably through recent trade, as both the precious commodity price and Aussie currency have fallen considerably from previous highs. And though we cannot expect the highly volatile AUDUSD pair to match gold’s moves on a tick-per-tick basis, it seems relatively clear that said prices will tend to follow the same trends over the same stretch. Given their historically strong link, the AUDUSD seems a good proxy to trade secular shifts in gold market trends.
US Dollar/Canadian Dollar and the US S&P 500
The high-flying Canadian Dollar remains quite closely correlated with the US S&P 500 and broader ‘risk’ sentiment—a somewhat unusual but important factor to note if trading the USDCAD. Correlations never imply causality. That is, a drop in the S&P will not necessarily lead to a rally in the USDCAD. Yet the fact that the two seemingly unrelated asset classes have moved in virtual tandem underlines that the Canadian Dollar remains highly correlated to financial market risk sentiment. Loonie bulls should keep a close eye on high-flying stock market prices, as any significant corrections would likely coincide with a similarly sharp upward move in the USDCAD.
The views expressed are not FNArena's (see our disclaimer).
For real time news and analysis, please visit http://www.dailyfx.com/real_time_news
DailyFX provides forex news on the economic reports and political events that influence the currency market. Learn currency trading with a free practice account and charts from FXCM.
www.dailyfx.com
Disclaimer
Forex Capital Markets is headquartered at Financial Square 32 Old Slip, 10th Floor, New York, NY 10005 USA.
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before you decide to trade the foreign exchange products offered by Forex Capital Markets, LLC, Forex Capital Markets Limited, inclusive of all EU branches, FXCM Asia Limited, or FXCM Australia Limited, any affiliates of aforementioned firms, or other firms under the FXCM group of companies [collectively “FXCM Group”] you should carefully consider your objectives, financial situation, needs and level of experience. If you decide to trade foreign exchange products offered by FXCM Australia Limited you must read and understand the Financial Services Guide and the Product Disclosure Statement. FXCM Group may provide general market information and commentary which is not intended to be investment advice and the content of this email must not be construed as personal advice. By trading, you could sustain a total loss of your deposited funds and therefore, you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with trading in foreign exchange products. Foreign exchange products are only suitable for those customers who fully understand the market risk. FXCM recommends you seek advice from a separate financial advisor.
FXCM Group assumes no liability for errors, inaccuracies or omissions in these materials and does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. FXCM Group shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. This email is not a solicitation to buy or sell currency. All information contained in this e-mail is strictly confidential and is only intended for use by the recipient. All e-mail sent to or from this address will be received by the FXCM corporate e-mail system and is subject to archival and review by someone other than the recipient.”
Technical limitations
If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.
