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The Canadian Dollar's correlation to Crude Oil Futures prices has hit near record-highs, as the export-dependent country's currency has regained its sensitivity to energy costs. The 20-day correlation between the USD/CAD and the front-month NYMEX Crude Oil Futures price now stands at an impressive -0.65—variations in crude oil prices can explain approximately 40 percent of movements in the Canadian dollar.
A jump in sensitivity underlines the notion that markets remain very strongly connected, and common factors may continue to move currencies and other key asset classes.
Forex Correlations Summary
Forex correlations against Oil, Gold, and the Dow Jones Industrials Average for the past 30 calendar days:
Strongest Forex Correlations
US Dollar/Canadian Dollar and the Price of Oil Futures
The Canadian dollar's correlation to crude oil now trades at its highest levels since at least 1986—emphasizing the currency's sensitivity to a key Canadian export. The highly trade-dependent country has lost significant revenues on one of its major resources as oil has fallen significantly off of record-highs. The USD/CAD has rallied in that time, but oil futures' recent recovery bodes well for the Loonie. A continuation in the recent uptrend for oil prices would suggest that the USD/CAD is likely to break to further lows.
Australian Dollar/US Dollar versus the Reuters CRB Commodities Index
The Australian dollar remains one of the most commodity-dependent currencies in the G10, and it is no surprise to see the AUD/USD-CRB Commodities Index correlation trade near record-highs. In fact, the 20-day correlation coefficient now stands at an impressive 0.76—implying that nearly 60 percent of all AUD/USD variation can be explained by commodity price movements. Commodity price sensitivity to global financial risk sentiment leaves it in the same league as the risk-sensitive Australian Dollar. Of course it's likewise significant to note the Australian economy's dependence on commodity exports. We expect the strong correlation to persist through the foreseeable future.
Weakest Forex Correlations
Euro/US Dollar and Gold Futures Prices
The US Dollar has increasingly moved away from its historical correlation to Gold prices. Gold was previously seen as a hedge from inflation and against fiat currency weakness. Yet gold itself has increasingly been linked to global risk sentiment—acting as a store of value through times of market duress. This leaves it in much the same position as the US Dollar, and it is little surprise to see that the Gold-USD correlation now stands very near neutral through short-term trading.
Euro/US Dollar and
The highly-touted link between the US Dollar and Crude Oil prices has become much less significant, as the US Dollar has moved largely independently of developments in commodity markets. Whether or not this is a temporary shift is up for debate, but we would argue that the sharp drop in crude oil costs decreases its real impact on the US Dollar exchange rate. Regardless of the reasons, it seems that crude oil has little effect on most major US dollar currency pairs.
Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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