Crude Oil Tumbles, US Dollar Rallies on Record-High Correlation

The correlation between the EURUSD and NYMEX Crude Oil futures has recently hit its highest levels since the inception of the euro—underlining the importance of commodity prices in determining the trajectory of the US dollar.  It seems that the relationship between oil and the US dollar remains stable, and we would argue that it will be important to watch for any significant price moves in oil while trading the US dollar and vice-versa.

The relationship between the Australian dollar and commodity prices has never been stronger; a rolling 1-year correlation between the AUDUSD and Reuters/Jefferies CRB Index now trades at its highest since the Aussie became a free-floating currency in 1984. As is the case for the EURUSD, the fact that the US dollar itself is moving almost lock-step with oil futures explains a good deal of this dynamic. AUDUSD outlook will largely depend on outlook for key commodities.  

Forex Carry Trade Basket and the US Dow Jones Industrials Average

The correlation between the Forex Carry Trade basket and the Dow Jones Industrials Average is considerably off of the heights seen through 2007, but we nonetheless see that the Japanese Yen has significantly picked up its correlation to risky assets through recent trade. Such a dynamic emphasizes that carry traders and USDJPY speculators should closely monitor developments in global equity markets.

Australian Dollar and the Dow Jones Industrials Average

One notable exception to the aforementioned carry trade/Dow Jones Industrials correlation remains the Australian Dollar. The AUDUSD continues highly related to global gold and other key commodity prices, but it seems as though its previously strong link to equities has since faded. Part of this is the fact that it has very much been moving to shifts in interest rate expectations, as the Reserve Bank of Australia recently cut interest rates for the first time in seven years. As such, it will likely be more important to watch developments in commodities and interest rate markets as it relates to AUDUSD trading.