In my earlier intermarket correlations update, I showed y’all how certain currency pairs and their correlated assets were showing signs of decoupling. This time around, stronger trends seem to be materializing and some relationships are being revived. 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
Both USD/CAD and crude oil were off to a slow start this 2017 as a lot of sideways action was seen. The commodity was unable to sustain the climb following the OPEC output deal in November last year as market participants turned their attention to the rising production levels in the U.S. and in Canada. Meanwhile, the currency pair was also pushed and pulled by fundamentals and political uncertainty.
However, volatility picked up mid-February when the BOC maintained its downbeat bias while Fed officials kept talking about the possibility of an interest rate hike this month. At the same time, U.S. crude oil inventories reached an all-time high of 520.2 million barrels, reviving oversupply fears and casting doubt that the output cuts would be effective.
Bearish action for oil and the oil-related Loonie kicked into high gear this week as the latest U.S. EIA report revealed a buildup of 8.2 million barrels in stockpiles. In contrast, the U.S. dollar was able to advance on a very upbeat ADP figure, signaling an upside surprise for the February NFP and sealing the deal for a March Fed hike.
AUD/USD vs. Gold
Another pairing showing stronger correlation lately is AUD/USD and gold. Earlier in the year, uncertainty surrounding Trump’s inauguration drove the precious metal’s price higher and dampened demand for the U.S. currency.
This time around, gold and AUD/USD are tight as bros once more, with both heading south on risk-off vibes. For one, the looming U.S. rate hike would likely weigh on global demand for commodities, which is negative for the export-driven Aussie and the precious metal. At the same time, this has boosted demand for the Greenback as the Fed decision draws near and economic reports have supported their hawkish bias.
EUR/JPY vs. S&P 500 Index
Last but certainly not least is this interesting behavior on EUR/JPY and the S&P 500 index. You see, EUR/JPY is typically considered a barometer for risk, which means that rising risk appetite is usually accompanied by a rally for the currency pair. Conversely, a pickup in risk aversion often translates to a decline for EUR/JPY.
However, as the chart above shows, the currency pair has been on a steady downtrend this year while the stock index has been buoyed by the so-called “Trump Effect” wherein expectations of infrastructure spending, tax reform, and financial deregulation are lifting stocks of U.S. companies. Although the euro seems to have recovered from “Frexit” concerns around the start of this month, it looks like the safe-haven Japanese yen is strongly supported as risk aversion is present outside the U.S. economy.
Do you think this divergence between EUR/JPY and U.S. stock indices will continue in the coming months? Or will the correlations between the commodities and comdolls break again? Don’t be shy to share your thoughts in our comments section below!