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Correlations: Australian Dollar Targets Highs as VIX at Lows

By , Quantitative Strategist
28 February 2012 08:30 GMT

We expect the Australian Dollar may continue its rally against the US Dollar as the S&P 500 Volatility Index (VIX) trades near multi-year lows and commodity prices continue higher.

The Australian Dollar’s substantial interest rate advantage over the US currency makes AUDUSD-long positions especially attractive to many speculators. That yield spread becomes especially significant when we see financial markets remain very complacent. Given that cross-market correlations remain quite strong, a low VIX suggests the AUDUSD could continue trading higher alongside the S&P 500 itself.

Forex Correlations Summary

View forex correlations to the SPDR Gold ETF Trust (GLD), United States Oil Fund ETF (USO), SPDR Dow Jones Industrial Average ETF Trust (DIA), UK FTSE 100 Index, and IShares Silver Trust ETF (SLV) prices.

GLD

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

-0.36

-0.67

0.00

-0.76

0.63

-0.74

0.66

1 Month

0.12

-0.09

-0.13

-0.04

0.31

-0.04

-0.08

3 Month

0.49

0.37

-0.20

0.58

-0.43

0.56

-0.56

1 Year

0.14

0.20

-0.10

0.24

-0.19

0.21

-0.25

USO

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.53

0.41

0.42

-0.45

0.24

-0.25

-0.14

1 Month

0.43

0.27

0.44

0.04

-0.14

0.05

-0.21

3 Month

0.36

0.32

0.12

0.45

-0.45

0.43

-0.38

1 Year

0.48

0.37

0.04

0.61

-0.59

0.52

-0.52

DIA

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.45

0.52

-0.42

0.38

-0.44

0.49

-0.79

1 Month

0.53

0.42

0.17

0.63

-0.80

0.44

-0.52

3 Month

0.55

0.52

-0.10

0.81

-0.79

0.70

-0.67

1 Year

0.64

0.54

-0.05

0.79

-0.82

0.74

-0.70

FTSE100

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.87

0.52

-0.07

0.54

-0.81

0.75

-0.67

1 Month

0.45

0.37

0.09

0.61

-0.70

0.64

-0.53

3 Month

0.43

0.30

-0.11

0.66

-0.62

0.64

-0.50

1 Year

0.46

0.36

0.00

0.69

-0.66

0.64

-0.56

SLV

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.09

-0.07

-0.31

-0.27

0.14

-0.17

-0.14

1 Month

0.48

0.16

-0.21

0.24

-0.02

0.19

-0.44

3 Month

0.58

0.45

-0.21

0.61

-0.55

0.59

-0.62

1 Year

0.31

0.29

-0.05

0.40

-0.36

0.35

-0.39

Perfect Positive Correlation:

1.00

Perfect Negative Correlation:

-1.00

australian_dollar_forecast_s_and_p_500_body_Picture_1.png, Correlations: Australian Dollar Targets Highs as VIX at Lows

Australian Dollar/US Dollar Exchange Rate (lhs)

Inverse of the US S&P 500 Volatility Index (VIX) (rhs)

Correlation between Australian Dollar and Inverse of US S&P 500 Volatility index (VIX)

The S&P 500 Volatility Index (VIX) trades near multi-year lows; correlations suggest that the Australian Dollar may continue to trade higher amidst such complacency. The so-called “Fear Index” shows that traders are pricing in some of the slowest stock market moves since the onset of the global financial crisis in 2008. Given that the Australian Dollar does best through stock market strength, we see ample upside in the high-flying commodity pair.

FX options market volatility expectations likewise favor Australian Dollar strength, while our technical AUDUSD forecast calls for further rallies. We see plenty of reasons to favor AUDUSD strength through the foreseeable future. The key question is long entries, and this author favors buying AUDUSD dips.

australian_dollar_forecast_s_and_p_500_body_Picture_2.png, Correlations: Australian Dollar Targets Highs as VIX at Lows

Dow Jones FXCM Dollar Index (lhs)

NYMEX West Texas Intermediate Crude Oil Front-Month Contract (rhs)Correlation between Crude Oil Prices and the USDOLLAR, Dow Jones FXCM Dollar Index

The US Dollar’s (ticker: USDOLLAR) correlation to Crude Oil Prices has broken down as of late, as both the USD and oil prices have strengthened in recent weeks. The disconnect suggests that a recent source of crude oil price strength is no longer the only factor to watch. In other words: Crude Oil prices could rally despite US Dollar strength.

Does this have any implications for USD traders? On the surface it seems that the current commodity bull market won’t necessarily derail the Greenback. Yet the Greenback’s correlation to the S&P 500 Volatility Index (VIX) remains quite strong. The fact that the VIX is at multi-year lows bodes poorly for the safe-haven currency.

Net result? Outlook for Crude Oil and other commodity prices remains bullish. Overall market correlations suggest that the Canadian Dollar and Australian Dollar could strengthen (USDCAD weakness, AUDUSD strength) amidst said trends.

--- 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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28 February 2012 08:30 GMT