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 Canadian dollar is positively correlated to crude oil prices or more commonly known as black crack. This means that a fall in crude oil is usually followed by a depreciation of the Canadian dollar while a rise in crude oil usually results to a rally in Canadian dollar values. This is because Canada is one of the world's top oil producers so higher prices translate to increased income and growth for Canada, which is good for the entire economy.
The U.S. dollar is typically negatively correlated to its equity market's performance. When U.S. equities are up, the U.S. dollar usually gets sold off because traders would rather put their money in higher-yielding and riskier assets than the safe-haven and lower-yielding U.S. dollar. This is because strong equities market is indicative of improved economic performance so traders are more risk-hungry while a weak equities market reflects a slowdown in economic growth so traders are more cautious.
As for most major currencies though, their local stock market performance is directly correlated to their currency's behavior. For instance, a rally in the Nikkei is usually positive for the Japanese yen while a drop in the FTSE index could trigger a selloff for the pound.
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 Canadian dollar is positively correlated to crude oil prices or more commonly known as black crack. This means that a fall in crude oil is usually followed by a depreciation of the Canadian dollar while a rise in crude oil usually results to a rally in Canadian dollar values. This is because Canada is one of the world's top oil producers so higher prices translate to increased income and growth for Canada, which is good for the entire economy.
The U.S. dollar is typically negatively correlated to its equity market's performance. When U.S. equities are up, the U.S. dollar usually gets sold off because traders would rather put their money in higher-yielding and riskier assets than the safe-haven and lower-yielding U.S. dollar. This is because strong equities market is indicative of improved economic performance so traders are more risk-hungry while a weak equities market reflects a slowdown in economic growth so traders are more cautious.
As for most major currencies though, their local stock market performance is directly correlated to their currency's behavior. For instance, a rally in the Nikkei is usually positive for the Japanese yen while a drop in the FTSE index could trigger a selloff for the pound.
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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