Article Summary: The Australian Dollar continues to plummet despite a US SP 500 at fresh record highs. Why—and more importantly—could the AUDUSD reverse?
Australian Dollar Correlation to SP 500 Has Weakened Significantly in 2013
Data source: Bloomberg, Chart Source: R
There are a number of reasons why the AUDUSD has moved independently of the SP—the largest of which is arguably an outright plummet in Gold prices. At the end of the day, however, it seems as though the Australian Dollar downtrend has been somewhat self-fulfilling.
Large forex speculators have sold aggressively into AUDUSD weakness, and futures speculators are now at their most net-short Australian Dollar on record—forcing further declines.
Australian Dollar Correlation to SP 500 Has Weakened Significantly in 2013
Data source: Bloomberg, CFTC Commitment of Traders Report. Chart Source: R
The most important thing to note is that positioning can remain extreme for extended periods of time, and THE sentiment turn is only clear in hindsight.
Yet we would argue (and have argued) that the Australian Dollar is much closer to a bottom than popular sentiment would suggest. Indeed our proprietary FXCM Speculative Sentiment Index data adds further evidence in favor of an AUDUSD relief rally.
Forex Retail Traders Are Extremely Net-long the Australian Dollar
Data source: FXCM Execution Desk Data. Chart: R
Retail traders remain their most net-long AUDUSD on record. We most often use the SSI as a contrarian indicator to price action: if traders are buying we typically look to sell. Yet the crowd is most often positioned correctly at the turns—there comes a point where the SSI is too one-sided to act as a contrarian indicator to price action.
Does a material breakdown in forex correlations, extremely bearish professional trader sentiment, and extremely bullish retail trader sentiment point to a AUDUSD bottom? There are no guarantees, but we would argue we’re much closer to a bottom than most people think.
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Forex Correlations Summary
View forex correlations to the SP 500, SP Volatility Index (VIX), Crude Oil Futures prices, US 2-Year Treasury Yields, and Spot Gold prices.
Data source: Bloomberg. Chart source: R
SEE GUIDE ON READING THE ABOVE CHART
— Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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David specializes in automated trading strategies. Find out more about our automated sentiment-based strategies on DailyFX PLUS.
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