Financial markets are interrelated and the forex market is no different. Price action in this particular market is often affected by movements in the equities, commodities, and futures markets. Here are some examples of intermarket correlations that you can use in forex trading.
The Australian dollar is known for its positive correlation with gold. Higher gold prices can lead to a rally for the Australian dollar while lower gold prices usually result to a depreciation for the Australian dollar. In the recent years, the correlation has been as high as 96%. This happens because Australia is a major producer of gold, so higher prices leads to higher export values and therefore increased income and growth for the Australian economy.
The next important correlation is the one between the Canadian dollar and oil prices. Higher crude oil prices can lead to a rally in the Canadian dollar while lower crude oil prices can trigger a Canadian dollar selloff. This takes place since Canada is one of the largest oil producers in the world so a spike in oil means more income for Canada, which is good for its economy and currency.
Next up is the correlation between the U.S. dollar and equities. Usually, the U.S. dollar acts as a safe-haven currency when risk appetite is down. Stronger equities performance is reflective of an improvement in overall economic growth, which leads traders to pursue higher-yielding currencies in exchange for the U.S. dollar while weak equities performance shows a downturn in economic growth, which is positive for the safe-haven U.S. dollar. In short, the U.S. dollar is negatively correlated to U.S. equities.
Take note though that other major currencies are typically positively correlated with their local equity market's performance. For example, the FTSE or the London stock index is reflective of the U.K. economic performance so a stronger market is usually positive for the pound. Meanwhile, a drop in the Nikkei index of Japan is almost always accompanied by a selloff by the Japanese yen.
Lastly, it's also worth noting that EUR/JPY is also correlated to risk sentiment because the Japanese yen sometimes acts as a safe-haven currency as well. In these cases, EUR/JPY rallies when risk is on and sells off when risk is off.
The Australian dollar is known for its positive correlation with gold. Higher gold prices can lead to a rally for the Australian dollar while lower gold prices usually result to a depreciation for the Australian dollar. In the recent years, the correlation has been as high as 96%. This happens because Australia is a major producer of gold, so higher prices leads to higher export values and therefore increased income and growth for the Australian economy.
The next important correlation is the one between the Canadian dollar and oil prices. Higher crude oil prices can lead to a rally in the Canadian dollar while lower crude oil prices can trigger a Canadian dollar selloff. This takes place since Canada is one of the largest oil producers in the world so a spike in oil means more income for Canada, which is good for its economy and currency.
Next up is the correlation between the U.S. dollar and equities. Usually, the U.S. dollar acts as a safe-haven currency when risk appetite is down. Stronger equities performance is reflective of an improvement in overall economic growth, which leads traders to pursue higher-yielding currencies in exchange for the U.S. dollar while weak equities performance shows a downturn in economic growth, which is positive for the safe-haven U.S. dollar. In short, the U.S. dollar is negatively correlated to U.S. equities.
Take note though that other major currencies are typically positively correlated with their local equity market's performance. For example, the FTSE or the London stock index is reflective of the U.K. economic performance so a stronger market is usually positive for the pound. Meanwhile, a drop in the Nikkei index of Japan is almost always accompanied by a selloff by the Japanese yen.
Lastly, it's also worth noting that EUR/JPY is also correlated to risk sentiment because the Japanese yen sometimes acts as a safe-haven currency as well. In these cases, EUR/JPY rallies when risk is on and sells off when risk is off.
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Forex price action is typically affected by the behavior of other financial markets so you should watch out for these important intermarket correlations when trading strong equities market
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