I spoke yesterday of the correlation between the German Bund yield, the euro and the DAX. I thought that I would take a look at a couple of other forex majors, AUD/USD and USD/CAD that exhibit strong correlations with other markets. The Aussie dollar holds close ties with the movements on gold and copper, whilst the Canadian dollar tend to move around with the price of oil. Gold and oil are in the process of potentially major moves, so what are the impacts on the Aussie and the Loonie?
The prospects of the Australian dollar are closely correlate to those of the metals prices. In Australia, 28% of total exports are metals such as gold, copper and iron ore. Mining remains the largest contributor to Australian GDP growth and subsequently theres are close links to the prospects of gold and copper prices. The chart below shows how the direction of the Aussie dollar is closely correlated to both gold and copper. The problem is that copper and gold have recently been in consistent decline.This does not bode well for the Aussie.
Despite the Aussie dollar engaging a rally this week, the continued downside in gold and copper would suggest that the Aussie could come under further pressure if these moves continue. Gold is in the process of breaking lower (a second close below $1178 today in addition to an intraday dip below $1170 would open further downside towards $1142.(almost 2.5% downside). The Aussie recently rallied from above the key support at $0.7530. But how long can AUD/USD prevent the sellers from a retest if gold continues lower?
The Canadian dollar is in a similar situation with the price of WTI oil. There is a clear negative correlation between the movement on USD/CAD and WTI (a rising USD/CAD denotes CAD weakness). This correlation has run since the latter stages of 2014. However the correlation has been tested in the past couple of weeks. The strengthening dollar has dragged USD/CAD higher, whilst the WTI price has been rather rangebound.
At today’s OPEC (Organisation of Petroleum Exporting Nations) meeting it appears as though there is still no desire to cut production levels. Current production levels by OPEC run at just over 31m barrels of oil per day despite the official target of 30m. The initial market reaction to this news today has been to provide support to the oil price, whilst the range remains intact on WTI. Perhaps this recent move higher on USD/CAD is running out of steam?