Correlations

One Asset Can Affect Another, So This is Important

CRUDE OIL CORRELATIONS.

Crude oil is the first asset we are going to look at. This is with West Texas Intermediate (WTI). There are correlations to certain currencies. These are the Japanese Yen and the Australian Dollar.

Analysis display that WTI future prices tend to be more correlated. It concerns the fluctuations of the Australian Dollar. This is instead of the ones experienced by the Japanese Yen.

Specifically, the relationship of the WTI/Australian Dollar averages around +0.23. Meanwhile the WTI / Yen is usually negative -0.17.

This means that the WTI futures tend to move more like the Australian Dollar does. However, their fluctuations are almost opposed to oscillations in the Japanese Yen.

A hedging tool which is frequently used is Asian currency. This means the fluctuations make sense. When the WTI plummets market players use these tools to by Yen.

GOLD MARKET CORRELATIONS.

Let’s look at gold prices. We will see how its relationship with different currencies behaves.

The WTI does not have a very good connection to the Japanese Yen and Australian Dollars. However, gold prices have a more stable and solid connection to these currencies than the WTI does.

In fact, the average correlation for the Yen is +0.35. Whereas, the average correlation for the Australian Dollar is +0.51.

Gold prices correlate to Australian Dollars. In the world Australia is one of the biggest gold producers.  Therefore, any considerable change in the price of this commodity will heavily influence the currency oscillation.

Furthermore, there is a fairly good relationship with the Japanese Yen. This is due to the fact that gold is often used as a hedging tool. (Just like the Asian currency).

Therefore the standard deviation and co-variance are going to move symmetrically.

The Five Key Correlations.

  • Japanese Yen.

    Japanese yen futures are a good hedging tool. Hold on to these when WTI oil futures are plummeting.

  • Australian Dollar.

    The Australian dollar tends to move along with crude prices. It can be used as an indicator to check the strength of the price trend.

  • Gold.

    Gold prices are well correlated to Australian dollars. Therefore, they tend to move and fluctuate in the same way.

  • Australian Dollars and Gold.

    Australian dollars are an extremely good indicator for price trends on the gold market and vice versa.

  • Japanese Yen and Gold.

    Japanese Yen futures tend to have a positive relationship with respect to gold prices. This is because both these assets are a hedging tool to reduce portfolio risks.

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