In my previous intermarket correlations update, I’ve shown y’all how crude oil and the Loonie seemed to be decoupling. This time, I’m also seeing signs of a split between Aussie and gold price action.
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
Early hints of BOC tightening from policymakers Wilkins’ testimony marked the start of the breakup between the Loonie and crude oil around the end of May. This carried on for most of June as the actual BOC statement drew near and traders began pricing in rate hike expectations.
And hike they did! Around that time, the central bank also emphasized that the Canadian economy has moved on from the oil industry slump, which explains why the Loonie managed to break its ties with the commodity.
But with the next BOC statement still a couple of months away and with no strong guarantees that another rate hike is in order, the Loonie appears to be renewing its relationship with crude oil.
Then again, a review of the latest oil inventory reports suggests that the commodity is finding some strength of its own. The Energy Information Administration has reported three consecutive weekly declines in stockpiles, somewhat easing global oversupply worries even as OPEC members struggle to comply with their output deal.
Moving forward, the Canadian dollar and crude oil could be driven by separate market factors so it’s tough to tell whether their price action could stay in sync or not.
AUD/USD vs. Gold
Changing market sentiment seems to be doing a number on the Aussie-gold correlation, although there were several instances wherein their positive relationship was sustained at the start of the year.
For the entire month of June, however, it’s noticeable how the precious metal has tumbled while the Australian currency kept climbing. If you recall, it was during this period that monetary policy biases took center stage and drove risk appetite higher.
Investors tend to put their money in gold when there are plenty of uncertainties in the markets, so it’s understandable how they dumped the precious metal when they eyed potentially higher profits from rate hike expectations.The safe-haven U.S. dollar wasn’t an attractive option then as well, especially since FOMC policymakers shared mixed views on inflation, rate hikes, and the balance sheet runoff.
So far this month, the U.S. currency is also being weighed down by weak economic data and delays in the Trump administration’s fiscal reform plan. Surprisingly, this risk factor is drawing some demand back for gold again while the Aussie remained supported by the RBA’s neutral stance and upbeat Chinese data.
Of course there’s also a chance that the recent climb in gold prices might merely be a correction from its drop in June. Do you think they’ll move in lockstep again for the rest of the month?
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 started in June in a bit of consolidation as the currency pair showed signs of topping out while the equity index appeared to be eyeing further gains.
Looking at how price action panned out, however, reveals that it was actually EUR/JPY that was gearing up for a strong rally in the latter part of June. As mentioned earlier, forex price action was driven by central bank biases back then, with hints of ECB tapering driving the shared currency higher and dovish remarks from the BOJ sparking a yen selloff.
Global bond prices came into play also, influencing demand for the lower-yielding yen. And just when the pair appears to have topped out earlier this month, the S&P 500 index got back on its feet thanks to mostly upbeat U.S. quarterly earnings reports.
All in all, it appears as though the intermarket correlations are in flux as commodities, equities, and currencies are being pushed around by different factors. Even though some positive correlations appear to be resuming, it’s possible that they could break once more as financial markets seem to have several moving parts these days.