GOLD Vs AUD: Will Gold Drag AUDUSD Up From The Trenches?

GOLD Vs AUD: Will Gold Drag AUDUSD Up From The Trenches?

Since the swing low late December, the positive correlation between spot Gold and AUDUSD has broken down to see Gold at 5-month highs whilst AUDUSD remains stuck within a choppy trading range. At some point we would expect this correlation to return, which would require Gold to drop lower, AUDUSD to play 'catch-up' or they meet somewhere in between...



Whilst not precise we can see that overall the AUDUSD and Spot Gold prices do tend to correlate over the longer time-frames. I have highlighted some of the more obvious areas where the correlation has become inverted with the most recent breakdown occurring right now. Taking the chart above into consideration I think we can safely assume a return to the positive correlation, Whilst the correlations have inverted they have not been for too long, so perhaps the positive correlation will return some time soon.

The rally on Gold from the December low has been impressive but we also need to remind ourselves we have seen similar (and larger) bullish runs which turned out to be corrective, only to see Gold print fresh new lows. For example the bullish run from June '13 low did trade higher and then return to a bearish trend. At time of writing Gold has also retraced from the highs around the October Swing high. So there is a small case for Gold to retrace further and perhaps AUDUSD break above 0.908 swing high in the coming weeks.



The chart above compares XAUUSD and XAUAUD. Here we can see Gold is clearly stronger than both AUD and USD but also interesting to note how AUD has been far weaker against Gold than USD as it has covered more ground since the December low. This does not have to remain constant and perhaps we will see XAGAUD retrace towards the October swing high (which would be bullish for AUD) and see a milder retracement on USD. If this occurs we would see bullish gains on AUDUSD, as the pair played 'catch-up' to XAUUSD.

Regardless my overall bias for AUDUSD remains bearish and for targets to be at 0.85 and 0.80 later this year, But be warned this still allows room for relatively deep corrections and perhaps see AUDUSD back above the 0.908 swing high and perhaps as far as 0.920-30 before the bearish trend accelerates.

SUMMARY

I expect the positive correlation between Spot Gold and AUDUSD to return
This requires a lower spot gold, higher AUDUSD or both (to meet in the middle)
Gold confirms AUD is weaker than USD since December swing low
However AUDUSD is holding ground where a break above 0.908 swing high opens up 0.920-30
This would then help the correlation to become back on track