Technicals | Nov 17 2011
By David Rodriguez, Quantitative Strategist
Correlations between the US Dollar (ticker: USDOLLAR ), Dow Jones Industrial Average, Silver prices, and the Australian Dollar trade near record-strength. Currencies continue to offer alternatives to positions in other markets.
The US Dollar’s (ticker: USDOLLAR ) record correlation to the Dow Jones Industrial Average and strong link to silver prices underline the fact that major markets continue moving in virtual lock-step. In effect this means that positions such as the Australian Dollar/US Dollar could be used as alternatives to positions in the DJIA and S&P 500, while the Euro/US Dollar’s link to silver prices offers similarly attractive proxies.
Forex Correlations Summary
View forex correlations to Gold, Oil, Dow Jones Industrial Average, UK FTSE 100 Index, and Silver prices.
Dow Jones Industrial Average versus Dow Jones FXCM Dollar Index
The Dow Jones FXCM Dollar Index (ticker: USDOLLAR) remains extremely correlated to the Dow Jones Industrial Average, underlining the fact that markets continue to flock to the safe-haven US currency during times of market stress. The Dow Jones remains in a progressively narrower trading range as the USDOLLAR persists above recent support levels.
Expect the next major break in the DJIA to coincide with similar moves in the Dow Jones FXCM Dollar Index. Given recent upward momentum in the Greenback and downward short-term momentum in stocks, we expect the USDOLLAR to break higher as the Dow Jones Industrial Average drops below congestion support.
Dow Jones Industrial Average versus Australian Dollar/US Dollar Forex Pair
The Australian Dollar retains its strong correlation to the Dow Jones Industrial Average, offering a high-yielding alternative to positions in the DJIA. As the highest-yielding currency of the G10, the Australian Dollar has been a speculator’s currency of choice during times of robust risk sentiment. Of course, high yields are a double-edged sword: when markets sell off, the Australian Dollar likewise falls sharply.
We expect the AUDUSD to remain a strong proxy to trading the Dow Jones and other risky asset classes.
Euro/US Dollar versus Price of Silver
The Euro/US Dollar has become strongly correlated to the price of silver, acting as a relatively strong proxy to positions in the silver market. One thing worth noting is that this correlation has been fairly volatile in the past year-frequently flipping between positive and negative amidst broader market volatility. Yet at its core, we expect silver prices to remain correlated to US Dollar pairs.
The precious/industrial metal remains a hedge against US Dollar weakness, and many have looked to silver during times of sharp USD sell-offs. We expect this to continue to be the case, and silver similarly stands to lose on any sharp Greenback rallies.
The views expressed are not FNArena's (see our disclaimer).
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Technical limitations
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