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Cheat Sheet for Intermarket Analysis
Correlations Between Currencies, Commodities, Stock Indices, and Bonds: A Comprehensive Cheat Sheet
Financial markets are deeply interconnected, and understanding these correlations can help traders predict price movements more accurately. This cheat sheet offers a detailed overview of key correlations, explaining why they exist and how to use them effectively in trading.
Currency and Commodity Correlations
| Commodity | Currency Pair | What Happens | Why |
|---|---|---|---|
| Gold 🪙 | USD 🔽 | The USD weakens as gold prices rise. | Gold is a traditional "safe haven" during economic instability. Investors trade USD for gold, reducing USD demand. |
| Gold 🪙 | AUD/USD 🔼 | The Australian dollar strengthens when gold prices rise. | Australia is one of the largest gold producers globally. Higher gold prices boost the country's revenue and currency. |
| Gold 🪙 | NZD/USD 🔼 | The New Zealand dollar rises with gold prices. | New Zealand benefits from rising gold prices due to its export reliance. |
| Gold 🪙 | USD/CHF 🔽 | USD/CHF falls as gold prices rise. | The Swiss franc strengthens due to over 25% of Switzerland's reserves being backed by gold. |
| Oil 🛢️ | USD/CAD 🔽 | The Canadian dollar strengthens when oil prices rise. | Canada is a leading oil exporter to the U.S. Higher oil prices increase export revenues. |
| Oil 🛢️ | NOK/USD 🔼 | The Norwegian krone strengthens with rising oil prices. | Norway, a key oil exporter, benefits from higher oil prices, strengthening its economy and currency. |
| Oil 🛢️ | RUB/USD 🔼 | The Russian ruble strengthens when oil prices rise. | Russia heavily depends on oil exports, making its currency sensitive to oil price changes. |
Currency and Bond Correlations
| Asset | Currency | What Happens | Why |
|---|---|---|---|
| Bonds 📈 | Local Currency 🔼 | The currency of a country with higher bond yields strengthens. | Higher yields attract foreign investment, increasing demand for the local currency. |
💡 Example:
An increase in U.S. 10-year Treasury yields attracts capital to the USD, strengthening the dollar. Conversely, falling yields weaken the USD as investors seek better returns elsewhere.
Currency and Stock Index Correlations
| Index | Currency Pair | What Happens | Why |
|---|---|---|---|
| Dow Jones 📈 | USD/JPY 🔼 | USD/JPY rises as the Dow Jones strengthens. | Optimism in the U.S. economy increases demand for the USD. |
| Nikkei 📈 | USD/JPY 🔼 | USD/JPY rises alongside Japan's Nikkei index. | Investors use the yen to fund trades in Nikkei, weakening the JPY. |
| DAX 📈 | EUR/USD 🔼 | EUR/USD rises when the DAX index strengthens. | A stronger German economy attracts capital inflows into the eurozone, boosting EUR demand. |
| FTSE 📉 | GBP/USD 🔽 | The GBP weakens when the FTSE index falls. | A weaker stock market can indicate economic issues, reducing demand for the GBP. |
Commodity and Stock Index Correlations
| Commodity | Index | What Happens | Why |
|---|---|---|---|
| Oil 🛢️ | Dow Jones 🔼 | The Dow rises with oil prices. | The U.S. energy sector benefits from higher oil prices. |
| Gold 🪙 | S&P 500 🔽 | The S&P 500 falls when gold prices rise. | Rising gold prices often signal investors fleeing riskier assets like stocks. |
How to Use Correlations in Trading
-
Identify Key Markets
Focus on major markets influencing your currency pair. For instance, if you trade USD/CAD, monitor oil prices and U.S. bond yields. -
Track Global Events
Stay updated on central bank policies, geopolitical developments, and macroeconomic data, which can shift correlations. -
Leverage Analytical Tools
Use charts to compare movements between assets. Analyze currency pairs alongside oil, gold, or stock indices to identify trends. -
Analyze Long-Term Trends
Correlations are more reliable over extended periods, where fundamental factors exert stronger influence.
Strengths and Weaknesses of Correlation Analysis
Strengths:
- Provides insights into market interconnections.
- Enhances prediction accuracy.
- Accounts for macroeconomic factors influencing multiple markets.
Weaknesses:
- Correlations are not constant and may weaken over time.
- Unexpected events like geopolitical crises can disrupt relationships.
- Requires deep knowledge of multiple markets.
Conclusion
Understanding correlations between currencies, commodities, stock indices, and bonds is an essential tool for traders seeking to navigate financial markets effectively. While these relationships offer valuable insights, they must be used as part of a broader trading strategy that incorporates technical and fundamental analysis.
By mastering correlations and integrating them into your trading plan, you can gain a deeper understanding of market dynamics and make more informed decisions in the ever-changing world of Forex. 🧠📈