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In my earlier intermarket correlations update, I showed y’all how certain currency pairs and their correlated assets were showing signs of reviving their relationship after decoupling earlier, although EUR/JPY and the S&P 500 were doing the opposite, since they were showing signs that they were parting ways.

This time around, the situation got flipped since EUR/JPY and the S&P 500 were dancing together again while the other currency pairs and their correlated assets showed diverging price action.

Oh, 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

USD/CAD vs. Crude Oil
USD/CAD vs. Crude Oil

When we saw them last, USD/CAD and oil appeared to be marching in step to the beat of the same drummer. However, price action since then showed some divergence. Although there are early signs that the relationship may be getting revived.

Oil traded roughly sideways for most of March, but USD/CAD made a strong bearish move in early March. And y’all can (probably) see what I mean, because I marked that big bearish spike in the chart above. Seriously, you can’t miss it.

It was more about U.S. dollar weakness than Loonie strength, though, since that bearish spike was a reaction to the March FOMC statement.

You see, the Fed launched a media blitz that over-hyped the market to such an extent that the market began to think that the Fed would not only hike in March, but would announce a faster of pace of hiking as well.

And while the Fed did hike as expected, the market was dismayed to learn that the Fed not only maintained its projections for the Fed Funds Rate, the Fed also maintained its economic projections.

Anyhow, USD/CAD tracked oil after the bearish spike until signs of divergence began to show up again, beginning on March 26.

At that time, oil started to rally (chart for oil is inverted), thanks to growing expectations that OPEC may be extending its oil cut deal. And oil’s rally was sustained by positive events (for oil), such as supply disruptions because of armed protests in Libya.

Despite the oil rally, USD/CAD continued to trade sideways and even began tilting higher by early April. This was due in large part to disappointing Canadian data, such as Canada’s $972 million trade deficit in February, which reinforced the BOC’s dovish stance.

Oil continued to rally, though, and so USD/CAD later began to dip again. And it probably helped that the BOC wasn’t as dovish and signaled a more neutral policy bias during the April BOC statement, although the BOC did highlight a potential housing bubble.

However, oil began retreating again last week, and USD/CAD appears to be following suit. And the slide in oil prices is being blamed by market analysts on worries over rising U.S. oil output, especially since U.S. shale oil output is expected to print the biggest month-on-month surge in more than two years come May.

AUD/USD vs. Gold

AUD/USD vs. Gold
AUD/USD vs. Gold

As you can clearly see, there’s also some divergence going on between AUD/USD and gold.

Gold continued to trend higher from late March to about mid-April, thanks to the prevalence of risk aversion, given jitters over the U.S. healthcare bill, the upcoming French elections, the possibility of another Scottish independence referendum, Article 50 of the TEU getting triggered, Trump’s missile strike in Syria, posturing between the U.S. and Nuclear North Korea, and friction between Russia and the U.S. over Trump’s Syrian missile strike (among others).

Wow! That’s a lot of geopolitical risk events. It’s therefore no real wonder why safe-haven demand for gold was high.

Even so, AUD/USD opted to go in the opposite direction instead. And that was very likely because of Aussie weakness, thanks to the RBA’s fading optimism and growing worries over the labor market and inflation, as revealed by the minutes of the RBA’s March meeting and the April RBA statement.

In addition, iron ore, Australia’s main commodity export, has been slumping very hard recently, thanks to the buildup in Chinese steel inventories and wavering faith in the Trump Effect. And that’s very likely weighing down on AUD/USD as well.

EUR/JPY vs. S&P 500 Index

EUR/JPY vs. S&P 500 Index
EUR/JPY vs. S&P 500 Index

Last time around, I pointed out that very noticeable divergence between EUR/JPY and the S&P 500. And I linked that to the the so-called “Trump Effect” which buoyed the U.S. equities market, thanks to expectations of infrastructure spending, tax reform, and financial deregulation under the Trump administration.

But as y’all can see, EUR/JPY and the S&P 500 index have both been trending lower while moving roughly in tandem since then. What happened? Well, the “Trump Effect” lost its mojo that’s what.

You see, a new narrative emerged in March that the vote on the U.S. healthcare bill would be a litmus test for Trump’s ability to bend the Republican Party to his will and push through with his agenda, which obviously includes Trump’s fiscal stimulus plans – the very basis of the “Trump Effect”.

And when the Republicans ultimately decided to pull the healthcare bill once it became clear that the Republicans were divided on the issue, faith in the “Trump Effect” began to waver, causing the S&P 500 to start tumbling. EUR/JPY, for its part, began to tank as well, as safe-haven demand for the yen picked up.

Aside from wavering faith in the Trump Effect, there were also all those risk events I mentioned earlier, which very likely soured risk sentiment while strengthening safe-haven demand. And one of those risk events, particularly the upcoming French presidential elections, was also very likely weighing down on the euro, helping to push EUR/JPY lower.