If you have encountered the term Intermarket analysis, it talks about a study focused on the connection between asset classes like currencies, bonds, stocks, or commodities. This study is a big help for traders because it gives them ideas and clues about market turning points, validates another analysis used, and the like, to make sound trading decisions. Furthermore, the currencies’ price action behavior depends on their connection with commodities, stock indices, and bonds.
Let us cite examples of Intermarket relationships.
An increasing commodity price is almost synonymous with a growing economy. This fact is positive for the stock market but negative for bond prices. An increasing bond price with declining interest rates is good news for stocks, while a declining bond price with a rising interest rate is not. The relationship between the US Dollar and the commodities price is inverse. A declining USD means a rise in commodities price, while an increase in USD implies a decline in commodities price.
Let us summarize
There are more scenarios like the ones we have mentioned. Here is a summary that you can use as a reference from time to time:
- An increase in gold means a decline in USD. Investors will most likely choose gold over gold when there is economic instability because gold will always appreciate or at least maintain its intrinsic value.
- An increase in gold means an increase in AUD/ USD. Australia has strong ties with gold. It is the world’s third top gold producer, with about $5 billion worth of revenue every year.
- An increase in gold means an increase in NZD/ USD. Like Australia, New Zealand is also one of the world’s top gold producers, and it sits in the top 25.
- An increase in gold means a decline in USD/ CHF. When gold increases, the USD/ CHF declines. Hence, investors buy CHF. Gold backs up at least 25% of Switzerland’s reserves.
- An increase in gold means an increase in EUR/ USD. We can consider the Euro and gold as anti- dollars.
- An increase in oil means a decline in USD/ CAD. Canada is the world’s top five oil producers. Furthermore, it has more or less 5.5 million oil barrel exports per day to the US.
- An increase in bond yields means an increase in local currency. An economy that can give a higher return on its bonds is most likely attractive for investors. An attractive currency also means attractive local currency against the others that offers lower returns on its bonds.
- A decrease in Dow Jones also means a decrease for Nikkei. The US’s economic performance massively impacts Japan’s.
- A decrease in Nikkei also means a decrease for the USD/ JPY currency pair. Investors somehow always have confidence in the Japanese Yen. When there is an economic turmoil, the Japanese Yen is the one that they will most likely seek.
We hope this helps
May this summary be helpful to you whenever there is a related situation, and you need a reference.