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Why is the Australian Dollar Falling Sharply?

The Australian dollar has fallen significantly through recent currency trading, as the highly commodity-sensitive currency continues to trade lower on a similar tumble in gold and other commodity prices. The Reuters/Jefferies CRB index registered its single-largest daily loss since March—driven by a $4.30 dive in crude oil futures. Given that the Australian Dollar previously rallied to post-float record highs on similar heights in major commodity markets, it is perhaps little surprise to see the AUDUSD fall significantly on the recent downturn. In fact, the Australian Dollar currently holds its strongest year-long correlation to the CRB Index since the currency’s free-float in 1984.

A cursory look at year-to-date charts comparing price action in the Australian Dollar and the CRB Index only emphasizes this point, and we see that the currency remains highly sensitive to the trajectory of the widely-followed commodities benchmark index.  

 A year-to-date regression on the Australian Dollar and Gold Prices suggests that the Australian Dollar stands to lose 0.25 percent for every 1 percent drop in the COMEX Gold contract.

Given such a dynamic, it will be more important than ever to monitor day-to-day changes in gold and other commodity standpoint for the Australian dollar trader. A shift in the secular uptrend for Gold Prices could lead to a similar shift in long-term trends for the Australian Dollar—leading it sharply lower against its US namesake.

Written by David Rodriguez, Quantitative Analyst for DailyFX.com.

We love hearing from readers. To contact the author of this report, e-mail drodriguez@dailyfx.com.