Correlation between Australian Dollar/ Exchange Rate and the SPDR S&P 500 ETF Trust (SPY)



The Australian Dollar remains strongly correlated to the US S&P 500 Volatility Index, offering an interesting proxy to trading the US stock market. Australia boasts the highest short-term interest rates of the G10, and Aussie Dollar/US Dollar positions offer one of the biggest interest rate differentials for major currencies.
The SPDR S&P 500 ETF Trust tracks the US S&P 500 with near-perfect accuracy. Yet based on dividend yield alone, the Australian Dollar seems like an attractive alternative to the popular ETF. According to Google Finance, the Dividend Yield of the SPY currently stands at 1.91%. The spread between overnight interbank rate in Australian and US Dollars stands at a significant 4.27%. FX traders won’t receive that full spread due to transaction costs, but the spread will remain superior.
The major risk in using the AUDUSD as a proxy for trading the S&P 500 is that the correlation will break down. Yet we see few reasons for why that might happen, and indeed the link remains strong through recent trading


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