It’s been a couple of months since my last intermarket correlations update, so it’s about time we checked up on how these relationships are faring.
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
Following a slow start for most of Q1 and a bit of decoupling with USD/CAD on FOMC action, the commodity got a boost in early April on expectations of an OPEC output deal extension.
The positive correlation between crude oil and the Loonie was renewed as rising U.S. oil rig counts and stockpiles kept oversupply concerns in play until mid-May while the BOC’s slightly dovish tilt and housing market woes weighed on the Canadian currency.
The OPEC’s decision to extend its output agreement by nine months until March 2018 eased speculations of a global oil glut, leading to a rebound for Black Crack and the oil-related Loonie at the end of the month.However, the commodity took another tumble this June on Saudi Arabia’s rift with Qatar and Libya’s Wintershall deal, both threatening to make the production agreement less effective. Interestingly enough, the Loonie seemed immune to oil’s slide as BOC policymaker Wilkins spoke about potential rate hikes.
Still, price action so far this week suggests that USD/CAD and crude oil are poised to revive their inverse correlation again.
AUD/USD vs. Gold
The Aussie and the precious metal were off to a solid start in Q1, but the positive correlation seemed to break apart in March to mid-April as several geopolitical risks came into play.
Around that time, dollar traders were a bit more jumpy than usual as a number of those risks directly or indirectly affected the U.S. economy, generating a lot of market uncertainty that favored gold as a safe-haven.
To top it off, the Aussie grew more sensitive to iron ore price action as a bit of attention turned to somewhat downbeat Chinese data. Expectations of a slowdown stemming from falling PMI readings weighed on the commodity’s demand, dragging AUD down even while gold was on the rise.
Towards the end of the month, though, the Aussie and gold started moving in lockstep again and this positive correlation seems to set to carry on for the rest of June.
EUR/JPY vs. S&P 500 Index
Last but most certainly not least is EUR/JPY and S&P 500, which are often considered barometers of risk sentiment.
The two had been walking hand-in-hand from March until early May, but the correlation seems to have broken down as the stock index kept climbing while the currency pair showed signs of topping out.
Around that time, renewed expectations that Obamacare could be repealed to give way to the Trump administration’s proposed healthcare reform shored up U.S. markets once more. However, risk-off flows were prevalent in the forex market after terror attacks in Paris and London, dampening gains for EUR/JPY.
The currency pair seems to be trying to catch up to the S&P 500’s rally lately, though, but it looks like Brexit jitters could keep the euro’s gains in check. Still, a strong pickup in risk-taking might lead to yen weakness, propping EUR/JPY higher.