Intermarket Correlations

Just because you’re a piptastic forex trader, that doesn’t mean you should only keep tabs on the currency market. Learn how the commodities, bonds, and equities markets affect forex!

How Gold Affects AUD/USD and USD/CHF

Before we detail the relationship between the com-dolls and gold, let’s first note that the U.S. dollar and gold don’t quite mesh very well.

Usually, when the dollar moves up, the gold falls and vice-versa.

How Gold Affects AUD/USD and USD/CHF

The traditional logic here is that during times of economic unrest, investors tend to dump the greenback in favor of gold.

Unlike other assets, gold maintains its intrinsic value or rather, its natural shine!

Gold and AUD/USD

Nowadays, the inverse relationship between the Greenback and gold still remains although the dynamics behind it have somewhat changed.

Because of the dollar’s safe haven appeal, whenever there is economic trouble in the U.S. or across the globe, investors more often than not run back to the Greenback.

The reverse happens when there are signs of growth.

Take a look at this awesome chart:

Gold's positive correlation with AUD/USD

Currently, Australia is the third biggest gold-digger… we mean, gold producer in the world, sailing out about $5 billion worth of the yellow treasure every year!

Gold has a positive correlation with AUD/USD.

When gold goes up, AUD/USD goes up. When gold goes down, AUD/USD goes down.

Historically, AUD/USD has had a whopping 80% correlation to the price of gold!

Not convinced? Here’s another one:

Gold and USD/CHF

Gold's negative correlation with USD/CHF

Across the seven seas, Switzerland‘s currency, the Swiss franc, also has a strong link with gold. Using the dollar as base currency, the USD/CHF usually climbs when the price of gold slides.

Conversely, the pair dips when the price of gold goes up. Unlike the Australian dollar, the reason why the Swiss franc moves along with gold is because more than 25% of Switzerland’s money is backed by gold reserves.

Gold has a negative correlation with USD/CHF.

When gold goes up, USD/CHF goes down. When gold goes down, USD/CHF goes up.

Isn’t that awesome?

The relationship between gold and major currencies is just ONE of the many that we will tackle. Keep reading!

How Oil Moves with USD/CAD

Let’s talk about the other kind of gold… the black one.

As you may know, crude oil is often referred to as the “black gold” or as we here at like to call it, “black crack.”

How Oil Affects USD/CAD

One can live without gold, but if you’re a crack addict, you can’t live without crack.

Oil is the drug that runs through the veins of the global economy as it is a major source of energy.

Canada, one of the top oil producers in the world, exports over 3 million barrels of oil and petroleum products per day to the United States.

This makes it the largest supplier of oil to the U.S.! This means that Canada is United States’ main black crack dealer!

U.S. Oil Imports by Country

Because of the volume involved, it creates a huge amount of demand for Canadian dollars.

Also, take note that Canada’s economy is dependent on exports, with about 85% of its exports going to its big brother down south, the U.S. Because of this, USD/CAD can be greatly affected by how U.S. consumers react to changes in oil prices.

If U.S. demand rises, manufacturers will need to order more oil to keep up with demand. This can lead to a rise in oil prices, which might lead to a fall in USD/CAD.

If U.S. demand falls, manufacturers may decide to chill out since they don’t need to make more goods. Demand for oil might fall, which could hurt demand for the CAD.

Oil has a negative correlation with USD/CAD of about 93% between 2000 through 2016.

When oil goes up, USD/CAD goes down. When oil goes down, USD/CAD goes up.

And to make the correlation clearer, we can invert USD/CAD to show how both markets move pretty much at the same time (i.e., crude oil will gain value with the Canadian dollar while the U.S. dollar falls…and vice versa. Check it out in the chart below:

Check it out in the chart below:

Crude Oil vs. USD/CAD Inverted
Crude Oil vs. USD/CAD Inverted

So, the next time you gas up your car and see that oil prices are rising, you can use this information to your advantage! It may be a clue for you to go short on USD/CAD!

Some forex brokers allow you to trade gold, oil, and other commodities. There, you can readily pull up their charts using their platforms. You can also monitor the prices of gold on Bloomberg. You can likewise check the prices of oil on Bloomberg as well.

If you want to learn more about gold and other commodities, I suggest you ask our comdoll expert Happy Pip.

Since she trades the commodity currencies, she often includes the price action of gold and oil in her analysis.

The U.S. Dollar And Oil Relationship Is Changing

Historically, the price of oil is inversely related to the price of the U.S. dollar. The explanation for this relationship is based on two well-known premises.

  1. A barrel of oil is priced in U.S. dollars across the world. When the U.S. dollar is strong, you need fewer U.S. dollars to buy a barrel of oil. When the U.S. dollar is weak, the price of oil is higher in dollar terms.
  2. The United States has historically been a net importer of oil. Rising oil prices causes the United States’ trade balance deficit to rise as more dollars are needed to be sent abroad.

The former still holds true today, the latter….not so much. Due primarily to the success of horizontal drilling and fracking technology, the U.S. shale revolution has dramatically increased domestic petroleum production.

In fact, the United States became a net exporter of refined petroleum products in 2011, and is now the third-largest producer of crude oil after Saudi Arabia and Russia!

Top Oil Producers

According to the Energy Information and Administration (EIA), the United States is now about 90% self-sufficient in terms of total energy consumption. The technological breakthrough of fracking has disrupted the status quo in the oil market, much like how Kylie Jenner’s Lip Kits disrupted the status quo in the cosmetic industry.

As U.S. oil exports have increased, oil imports have decreased. This means that higher oil prices no longer contribute to a higher U.S. trade deficit, and actually helps to decrease it.

As a result, we’ve seen the historically strong inverse relationship between oil prices and the U.S. dollar is becoming more unstable.

Dollar Oil Correlation

Over the past eight years, the rolling 6-month correlation coefficient was mostly negative but that’s starting to change.

Considering the new dynamics of the global energy market, it wouldn’t be surprising to see this historically negative correlation spend more time in positive territory. The relationship between oil and the United States seems to be changing, reflecting the country’s growing role in the global oil industry.

Is the dollar becoming a petrocurrency? A term given to currencies of countries like Canada, Russia, and Norway that export so much oil, that oil revenues make up a large part of their economy.

The United States has become the new swing producer of oil, meaning that its production levels hold the most influence over global oil prices. Before the shale revolution, it was Saudi Arabia.

The U.S. may start to trade more like a petrocurrency in the years to come. As the US continues to grow the share of oil exports over imports, revenue from oil will play a greater role in the U.S. economy and the U.S. dollar may start behaving like a petrocurrency….meaning when oil prices goes up, so does the currency.

Understanding why the dollar has historically traded inversely to the price of oil and why the correlation has weakened recently can help traders make more informed trading decisions as the global economy continues to evolve.

How Bond Yields Affect Currency Movements

A bond is an “IOU” issued by an entity when it needs to borrow money.

These entities, such as governments, municipalities, or multinational companies, need a lot of funds in order to operate so they often need to borrow from banks or individuals like you. When you own a government bond, in effect, the government has borrowed money from you.

You might be wondering, “Isn’t that the same as owning stocks?”

One major difference is that bonds typically have a defined term to maturity, wherein the owner gets paid back the money he loaned, known as the principal, at a predetermined set date.

Also, when an investor purchases a bond from a company, he gets paid at a specified rate of return, also known as the bond yield, at certain time intervals. These periodical interest payments are commonly known as coupon payments.

Bond yield refers to the rate of return or interest paid to the bondholder while the bond price is the amount of money the bondholder pays for the bond.

Now, bond prices and bond yields are inversely correlated. When bond prices rise, bond yields fall and vice-versa.

Here’s a simple illustration to help you remember:

Bond prices rise as bond yields fall

Still confused? How about this one?

Bond Yields Vs. Bond Price

Wait a minute… What does this have to do with the currency market?!!

Let’s ignore that question for now.

Always keep in mind that inter-market relationships govern currency price action.

Bond yields actually serve as an excellent indicator of the strength of a nation’s stock market, which increases demand for the nation’s currency. For example, U.S. bond yields gauge the performance of the U.S. stock market, thereby reflecting the demand for the U.S. dollar.

Let’s look at one scenario: Demand for bonds usually increases when investors are concerned about the safety of their stock investments.

This flight to safety drives bond prices higher and, by virtue of their inverse relationship, pushes bond yields down.

As more and more investors move away from stocks and other high-risk investments, increased demand for “less-risky instruments” such as U.S. bonds and the safe-haven U.S. dollar pushes their prices higher.

Government bond yields is that act as an indicator of the overall direction of the country’s interest rates and expectations.

For example, in the U.S., you would focus on the 10-year Treasury note.

A rising yield is dollar bullish. A falling yield is dollar bearish.

It’s important to know the underlying dynamic on why a bond’s yield is rising or falling.

It can be based on interest rate expectations OR it can be based on market uncertainty and a “flight to safety” with capital flowing from risky assets like stocks to less risky assets like bonds. After understanding how rising bond yields usually cause a nation’s currency to appreciate, you’re probably itching to find out how this can be applied to forex trading. Patience, young padawan!

Recall that one of our goals in currency trading (aside from catching plenty of pips!), is to pair up a strong currency with a weak one by first comparing their respective economies.

How can we use their bond yields to do that?

How Bond Spreads Between Two Countries Affect Their Exchange Rate

The bond spread represents the difference between two countries’ bond yields.

These differences give rise to carry trade, which we discussed in a previous lesson.

How Bond Spreads Between Two Countries Affect Their Exchange Rate

By monitoring bond spreads and expectations for interest rate changes, you will have an idea where currency pairs are headed. Here’s what we mean:

Positive correlation of bond spreads and AUD/USD

As the bond spread between two economies widens, the currency of the country with the higher bond yield appreciates against the other currency of the country with the lower bond yield.

You can observe this phenomenon by looking at the graph of AUD/USD price action and the bond spread between Australian and U.S. 10-year government bonds from January 2000 to January 2012. Notice that when the bond spread rose from 0.50% to 1.00% from 2002 to 2004, AUD/USD rose almost 50%, rising from .5000 to 0.7000.

The same happened in 2007, when the bond differential rose from 1.00% to 2.50%, AUD/USD rose from .7000 to just above .9000.

That’s 2,000 pips! Once the recession of 2008 came along and all the major central banks started to cut their interest rates, AUD/USD plunged from the .9000 handle back down to 0.7000.

So what happened here?

One factor that is probably in play here is that traders are taking advantage of carry trades.

When bond spreads were increasing between the Aussie bonds and U.S. Treasuries, traders load up on their long AUD/USD positions.


To take advantage of carry trade!

However, once the Reserve Bank of Australia started cutting rates and bond spreads began to tighten, traders reacted by unwinding their long AUD/USD positions, as they were no longer as profitable.

Here’s one more example:

GBP/USD vs. US-UK Bond Spread

As the bond spread between the UK bond and US bond decreased, the GBP/USD weakened as well.

How Fixed Income Securities Affect Currency Movements

A quick recap: So far, we’ve discussed how differences in rates of return can serve as an indicator of currency price movement.

As the bond spread or interest rate differential between two economies increases, the currency with the higher bond yield or interest rate generally appreciates against the other.Fixed income securities (including bonds) are investments that offer a fixed payment at regular time intervals.

Economies that offer higher returns on their fixed income securities should attract more investments.

This would then make their local currency more attractive than those of other economies offering lower returns on their fixed income market. For instance, let’s consider gilts and Euribors (we’re talking about U.K. bonds and European securities here!).

If Euribors are offering a lower rate of return compared to gilts, investors would be discouraged from putting their money in euro zone’s fixed income market and would rather place their money in higher-yielding assets.

Because of that, the EUR could weaken against other currencies, particularly the GBP. This phenomenon applies to virtually any fixed income market and for any currency.

You can compare the yields on the fixed income securities of Brazil to the fixed income market of Russia and use the differentials to predict the behavior of the real and the ruble.

Or you can look at the fixed income yields of Irish securities in comparison to those in Korea… Well, you get the picture.

If you want to try your hand at these correlations, data on government and corporate bonds can be found on these two websites:

You can also check out the government website of a particular country to find out the current bond yields. Those are usually pretty accurate. They are the government.

In fact, most countries offer bonds but you might want to stick to those whose currencies are part of the majors.

Here are some of the popular bonds from around the globe and their cool nicknames:

EconomyBonds Offered
United StatesU.S. Treasury bonds, Yankee bonds
United KingdomGilts, Bulldog bonds
JapanJapanese bonds, Samurai bonds
EurozoneEurozone bonds, Euribors
SwitzerlandSwiss bonds
CanadaCanadian Bonds
AustraliaAustralian Bonds, kangaroo bonds, Matilda bonds
New ZealandNew Zealand bonds, Kiwi bonds
SpainMatador bonds

Some countries also offer bonds with varying terms to maturity so just make sure you are comparing bonds with the same term to maturity (such as 5-year gilts to 5-year Euribors), otherwise your analysis would be off.

And we wouldn’t want that, would we?

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