Intermarket Correlations Update: AUD and Iron Ore

It’s been a couple of months since I last gave an update on forex intermarket correlations. Are they still holding up or are we seeing some changes?

USD/CAD vs. Crude Oil

If you’ve been a good student in our School of Pipsology, you’d remember that the Canadian dollar is usually positively correlated to crude oil because the energy sector accounts for a huge chunk of its overall economic activity. Since the Loonie moves in tandem with this commodity, oil price gains are typically accompanied by a drop in USD/CAD and vice versa.

USD/CAD vs. Crude Oil

USD/CAD vs. Crude Oil

As you’ve probably noticed from the chart above, this behavior was pretty evident during the first half of June (highlighted in the first green box) and in the third week of July (highlighted in the second green box). A bit of this action was also seen towards the end of June to early July when crude oil was trending lower while USD/CAD struggled to climb.

However, a break in this correlation was noticeable as the commodity and currency pair moved in the same direction around the start of August. As highlighted in the two red boxes, USD/CAD continued to head south even as crude oil prices tumbled, possibly as the pair became more sensitive to market sentiment and U.S. dollar price action.

AUD/USD vs. Gold and Iron Ore

As for the Australian dollar and gold, it looks like the positive relationship has been going strong as rallies in the precious metal have been met with AUD/USD gains for the past few months. But if you turn your attention to the price action highlighted in the yellow box, you might notice that gold has been turning slightly lower while the Aussie has managed to push higher.

AUD/USD vs. Gold

AUD/USD vs. Gold

One likely explanation for this behavior is that the Aussie also happens to share a really strong bond with iron ore prices. Spot iron ore has landed back above the $60/tonne mark in August, testing levels not seen since May this year after deliveries to China increased while their stockpiles were depleted.

Earlier this week, iron ore prices even climbed close to the $62/tonne level as Chinese shipments continued to rise. If you’re wondering what’s giving the commodity a boost, it’s mostly the credit-fueled property boom in China that’s supporting demand for the raw material, combined with a few signs of stability in its manufacturing sector.

Table from Business Insider Australia

Table from Business Insider Australia

Chinese iron ore imports were up 8.3% in July on a month-over-month basis, higher by 2.7% compared to the same month a year ago. Majority of these imports came from Port Hedland in Australia, which happens to be the world’s top iron ore loading terminal.

Think these forex correlations could keep holding up or are we about to see new patterns moving forward? Don’t be shy to share your thoughts on where these commodities or pairs might be headed!

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