Forex Correlations: Australian Dollar Proxy For Dow Jones, Metals | Learn Forex | GoLearnForex.com

We can see this correlation most clearly via the AUDUSD, Dow Jones Industrial Average, and base metals prices such as copper. To a lesser extent, the Australian Dollar has been tracking Crude Oil prices and represents an interesting proxy to the volatile energy price.

It is difficult to give a proper explanation on why the AUDUSD has lost its link to high-flying gold prices. Investors seem to be flocking to the precious metal as an anti-risk trade as the Dow Jones Industrial Average tumbles. As long as that remains the case, the AUDUSD will likely remain disconnected from spot gold prices.

Forex Correlations Summary

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

Read a guide on understanding the forex correlations summary chart.

Australian Dollar/US Dollar Pair versus Dow Jones Industrial Average

The Australian Dollar trades at a record-high correlation with the US Dow Jones Industrial Average, making the Aussie currency a high-yielding proxy for bets on the Dow. The link currently stands at a correlation coefficient of 0.92—translating to a “goodness of fit” of nearly 85 percent. In other words, Dow moves can explain nearly 85 percent of AUDUSD price action.

The Australian Dollar likewise boasts the highest short-term interest rate of any G10 currency. This means that the AUDUSD serves as a higher-yielding alternative to the widely-followed stock market index itself. Thus if you believe that the DJIA is headed higher, the AUDUSD represents an attractive and more liquid alternative to straight bets on the Dow itself.

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Australian Dollar/US Dollar Pair versus Gold Prices

The Australian Dollar has historically been a strong proxy for investments in gold, but a recent breakdown in the correlation suggests that the opposite is currently true. The short-term correlation between the AUDUSD recently matched its most negative since the Australian Dollar was free-floated in 1983.

One possible explanation is that gold has tended to do well amidst sharp declines in the Dow Jones Industrial Average and broader global equity markets. Investors and traders are treating it as a hedge against alternative investments, which may help to explain the disconnect between AUDUSD and gold spot prices. Suffice it to say, the Australian Dollar does not currently represent an attractive proxy to gold prices.

Australian Dollar versus the Price of Crude Oil

The Australian Dollar retains a fairly strong link to other commodity prices, and the correlation between Crude Oil and the AUDUSD remains noteworthy. As a hard commodity exporter, Australia’s economy remains sensitive to volatility in key raw materials prices. And though it is a net-importer of Crude Oil, Australia’s reliance on base metals such as copper means that its currency remains a good proxy for broader commodity prices.

Clearly gold prices are an exception to this rule as the recent link between spot gold and the AUDUSD has been negative. Yet the correlation between AUD and copper trades near record-strength, and the Australian Dollar seems a strong proxy for broader industrial activity. Given that it boasts the highest short-term yield of any G10 currency, any such bets offer the additional benefit of collecting interest rate differentials on AUDUSD positions.

Written by David Rodriguez, Quantitative Strategist for DailyFX.com

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