Well Known Correlations

US Dollar Index and EURUSD

If the USD Index (USDX or DXY) makes significant movements, we can almost surely expect currency traders to react to the movement accordingly. Both the USDX and spot currency traders react to each other. Breakouts in spot USD pairs will almost certainly move the USDX in similar breakout fashion.

In the wide world of Forex, the USDX can be used as an indicator of the U.S. dollar’s strength. Because the USDX is comprised of more than 50% by the euro zone, EUR/USD is quite inversely related.

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US Dollar Index and Gold

In the past 2-3 years, direction of USDX usually has high negative correlation with gold.

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USDCAD and Oil

Oil prices have a huge impact on the world economy, affecting both consumers and producers. Therefore the correlation between this commodity and currency prices is much more complex and less stable than that of gold. In fact, out of all of the commodity currencies, only one (the USDCAD) has any semblance of a connection with oil prices.

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AUDUSD and Gold

The AUDUSD has a very strong positive correlation with gold; therefore, whenever gold prices go up, the AUDUSD also tends to go up as the Australian dollar appreciates against the U.S. dollar. The reason for this relationship is that Australia is the world’s third largest producer of gold, exporting about $5 billion worth of the precious metal annually. Because of this, the currency pair amplifies the effects of gold prices twofold.

Thus, a trader who notes a rising trend in gold prices (or in other metals such as copper or nickel) might be wise to go long any one of the four commodity currencies instead. One interesting incentive to go long the AUDUSD instead of gold is the unique ability of expressing the same view but also being able to earn positive carry. Gold is also usually a solid indicator of the overall picture in the metals markets.

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USDCAD and Gold

The USDCAD has an even stronger correlation with gold prices, caused in large part by analogous reasons to the AUD’s connection; Canada is the fifth largest exporter of gold.

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USDCHF and USD Index

During times of geopolitical uncertainties, the Swissie tends to rally. An example of this could be found in the U.S. buildup to the war in Iraq. Many investors drew their money out of the USD and invested heavily in both gold and the CHF.

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