http://www.dailyfx.com/forex/fundamental/article/gold-forex_correlations/2011/01/07/Gold-Forex_Correlations_Remain_Extremely_Firm_as_Gold_Plunges_Dollar_Surges.html
Gold has been receiving an increasing amount of attention recently as the metal soars to new record levels. But you don’t have to trade gold to benefit from the metal’s recent volatility. In fact, many of the popular currency pairs have been moving in tandem with gold, offering forex traders an opportunity to piggyback on the uptrend or bet against it, with the added benefit of trading within the world’s deepest and most liquid market.
The following table includes the correlation between gold and the most popular currency pairs over various timeframes. A value close to +1 indicates a strong positive relationship between gold and the pair, while a value close to -1 indicates a strong negative relationship.
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| Gold | USD/CAD | AUD/USD | NZD/USD | EUR/USD | GBP/USD | USD/JPY | USD/CHF |
| 15 Min, 3 Day | -0.45 | 0.89 | 0.84 | 0.78 | 0.17 | -0.66 | -0.86 |
| 60 Min, 1 Week | -0.46 | 0.95 | 0.93 | 0.80 | -0.02 | -0.86 | -0.93 |
| 60 Min, 2 Weeks | -0.41 | 0.95 | 0.72 | 0.64 | 0.03 | -0.86 | -0.89 |
| Daily, 1 Month | -0.30 | 0.85 | 0.70 | 0.61 | 0.08 | -0.75 | -0.81 |
Weekly Commentary: Gold – FOREX correlations were extremely firm in the latest week, as gold plunged while the U.S. Dollar rallied sharply. Gold has now fallen the last five of six sessions, while the greenback has advanced for four straight sessions. We continue to consider AUD/USD and USD/CHF as the best pairs to trade for proxy gold exposure. Both had very strong correlations with gold in the latest week at 0.95 and -0.93, respectively.
The theme this week was strength in the U.S. economy. We saw the ISM non-manufacturing index reach its highest level since 2006, while the ADP employment report show a massive 297K increase in the labor force for the month of December. The greenback took its cues from these data, rallying sharply in response.
With that said, we don’t think it is the dollar rally per se that has caused gold weakness. Rather, the rapid strengthening in the U.S. economy has accelerated the timeline for when the Federal Reserve will begin to unwind its extremely loose monetary regime- including its zero interest rate policy- in our view. This may seem like an odd statement considering that the central bank is currently engaged in a massive $600 billion quantitative easing program. But just as downturns in the economy are difficult to foresee, so are the upturns. This is why QE2 was designed as a flexible program. If the labor force begins to quickly strengthen in step with the rest of the economy (nonfarm payrolls are due out later today), the Fed may reverse course swiftly.
A tightening of monetary conditions would be fundamentally bearish for gold and an extremely significant shift considering that overnight interest rates have been at zero for over two years now. But the impact on gold prices will be dependent on whether the tighter monetary conditions affect investor demand for the metal. If investors continue to pile into the metal regardless, prices won’t fall. That is a distinct risk to any bearish gold position.
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Gold ETF holdings fell for a third week and are now about 750,000 troy ounces below the record level of 68 million set in December. We will continue to watch movements in holdings carefully, as they are the best timely indication of investor demand for the metal.
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