Intermarket Correlations Update: Gold and AUD Back in Lockstep

Has it really been months since I last gave y’all an update on intermarket correlations? A lot went on in the charts since then, particularly now that commodities have been strongly reacting to risk sentiment and the looming OPEC meeting.

For the newbie traders out there, don’t forget to review our School lesson on forex correlations before reading on!

USD/CAD vs. Crude Oil

Since Black Crack has been all over the headlines these days, I figured we’d start off with how things are going between USD/CAD and crude oil. Keep in mind that the Loonie is positively correlated to the commodity because of Canada’s reliance on its energy sector, so USD/CAD usually moves in the opposite direction as WTI or Brent crude oil.

USD/CAD vs. Crude Oil

USD/CAD vs. Crude Oil

But as you’ve probably noticed from the chart above, this correlation doesn’t always hold true. The green boxes highlight when the diverging action between USD/CAD and crude oil was more evident while the red box indicates when the negative correlation wasn’t so strong.

In the latter part of October, expectations for an OPEC output deal had been weakening after Iran and Iraq seemed to be in no mood to participate in a production cut, causing a sharp drop in the commodity price and a rally for USD/CAD. However, crude oil prices appeared to bottom out earlier this month as energy ministers and OPEC experts have been doubling their efforts in ironing out an agreement before their official gathering in November 30.

AUD/USD vs. Gold

The relationship between Aussie and gold seems stronger than ever, as seen in the second green box highlighting the sharp tumble for AUD/USD and the shiny metal’s price. This comes after a bit of divergence in price action for August, but it looks like market sentiment and USD demand have been major driving forces for both these days.

AUD/USD vs. Gold

AUD/USD vs. Gold

In particular, the outcome of the U.S. elections spurred massive profit-taking for gold, which is seen to be a safe-haven asset. When investors managed to shrug off the uncertainties associated with Trump’s leadership, gold took a sharp tumble and dragged AUD/USD along with it due to nearly unstoppable dollar rallies. Now these themes are expected to stay in place for the remainder of 2016, especially since the FOMC is on track towards hiking interest rates next month.

EUR/JPY vs. S&P 500

Last but certainly not least is this matchup of EUR/JPY and the S&P 500 index, which are considered gauges of risk sentiment. The currency pair popped higher when the stock index and risk appetite surged back in July but seemed to top out from August to mid-October.

EUR/JPY vs. S&P 500 Index

EUR/JPY vs. S&P 500 Index

As with gold and AUD/USD, the post-election euphoria sparked strong gains for global indices and EUR/JPY. The U.S. stock index is breaking past record highs so there might be enough bullish momentum for the currency pair to advance, even as political risks are weighing on the shared currency. Think the Italian referendum and French election updates could cause this correlation to break, though?


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