Intermarket correlations forex

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Since commodities are raw materials, any fluctuations or volatility in the commodity front will definitely have an impact on the US capital market and will aid you in determining the future trajectory of the stock market. Intermarket analysis should be taken as a part of fundamental analysis as it depicts the inter-relations between markets and provides a general sense of direction rather than specific figures of pip or profit or loss projection.

Intermarket Analysis Correlations Doing analysis on an Intermarket basis is very simple and easy. As a trader, all you need is data that is cheap and easily available. You will have to download those, put those into a spreadsheet or charting platforms, and then go for calculating the correlation between them.

You must keep in mind that a perfect correlation between any two different marketplace or asset classes for a longer period of time is quite rare. As mentioned in different articles, we use Intermarket analysis very often. Most of the time we use it in our subconscious mind like when we discuss the stock prices and the lending rate prevailing in the economy then it is a perfect example of Intermarket analysis.

In this case, the analysis says that the relationship is perfectly inverse. On the other hand, if volatility increases in the currency market due to some external events like the US-China trade war, instability in the Middle East, or war in Ukraine tend to increase fluctuations in the currency market, and then investors and speculators alike start fleeing the forex and start flocking towards safe havens like buying gold.

This is another good example of one market getting affected by another in times of uncertainty. The scope of studying Intermarket analysis correlation is very wide. This article should be taken as a primer on this topic. Intermarket analysis correlation Between Gold and Currency Market Trading and investing in gold have been there for centuries.

In the past, gold coins were there as a currency, but gradually this practice ceased and people started keeping gold in stock as an investment tool in their portfolios. Gold has an intrinsic value in the minds of its investors. During times of extraordinary uncertainties, gold has come forward as an investment destination of the last resort. And if history is any indicator then this particular type of metal has never let its supporters down.

When turmoil increases in the global stage and people start looking for some sort of financial stability then investors and speculators alike start flocking towards purchasing gold. The same is true in the opposite situation. When the economy is sound and running on a strong footing then people start investing in USD. As we all know that the Australian dollar is a commodity currency, meaning the value of AUD gets affected heavily by the commodity industry, especially gold, operating in Australia.

Australia is blessed with some of the finest gold mines on earth. The gold nuggets that Australia extracts are bigger than any other found throughout the world. It represents the strong relationship that is there between the Australian legal tender and the all-weather safe-haven gold. Though Switzerland is a highly advanced economy that relies on its robust financial sector, gold also plays a major role in the Swiss economy.

Unlike Australia, Switzerland does not have that many gold mines but the crux of the situation is that most of the gold in the world passes through Switzerland. Switzerland imports crude gold and adds value by refining it to one of the highest levels of purity. On the other hand, four of the nine major participants in the world gold industry conduct most of their business here in Switzerland. These are three leading gold exporting countries that do not produce gold in themselves.

Switzerland also sources gold from Burkina Faso, Ghana, and Mali, these are countries that depend on gold as their largest exports. Just to give you a sense of how important a role gold plays in the Swiss economy is that during , Switzerland imported metric tons of gold which were valued at CHF 67 billion. Unlike gold, the demand for crude oil is there and will be there in the near future.

Countries need crude oil to fuel their economies. Oil is needed for producing electricity, running our vehicles, and carrying out production in our factories. So crude oil has a major role to play. Canada is one of the largest oil producers in the world. The country exports 3 million barrels of crude and petroleum products to the United States daily. This makes Canadian economy as the largest supplier of oil to the US. It also makes the Canadian dollar the commodity currency.

Due to the huge volume of oil in Canadian exports, the demand for the Canadian dollar or CAD is there. See the next chart, showing the same data on a daily basis. They both denote a true trend. Net-net over this period, the correlation coefficient was below zero, even though there have been periods of simultaneous movements in both assets. Oil black vs. The lesson here is that high correlation over a long period is not useful when trading in a short timeframe.

The relevant correlation coefficient for a Forex trader in the euro would be the minute, the one-hour, or the daily timeframes. As the US oil production numbers climb with every passing month, does not the rationale for the correlation go away?

Well, maybe. Energy prices are not included in the core CPI, so we cannot expect a change there, and even with export bans in place, the USA does not enjoy lower oil prices than the rest of the world because of its own production. So you have to ask, what decoupling? We can find cases where intermarket correlation and causation is clear. One is the period of declining oil prices in As oil price fell, the Norwegian currency tracked the decline. You can see it on the chart below.

Lower oil price means smaller inflow of foreign currency into the country and thus worse exchange rates. We need to be careful not to attribute the same kind of relationship to the major currencies and their export goods as seen in Norway's case. The Norwegian krone is not one of the major currencies and the country's economy is not among the world's largest, and we do not get clear one-to-one movements like this in bigger markets.

In the USA, for example, the correlation coefficient between oil and US equities from on a monthly basis is When oil goes up, US equities go down, but by such a tiny amount that for all practical purposes, we should consider it zero. This is a case in which the correlation may be high for short periods but not for long periods, exactly the opposite of the oil and euro case.

On monthly data from , the correlation coefficient is The implication is that a strong dollar is bad for US equities, presumably because it inhibits exports — but a number this small is statistically worthless. Perhaps if the data were daily instead of monthly or calculated over a shorter period, we would get at least a few higher correlation coefficients — but that defeats the purpose of having a one-size-fits-all coefficient.

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