It’s been a few months since my last intermarket correlations update, so I think it’s time I give y’all a quick snapshot of which relationships are holding up and which ones are breaking down.
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
Unless you’ve been living under a rock or haven’t gone on a road trip in ages, you’ve probably seen how crude oil prices have surged at the start of the year. This was mostly due to declining U.S. stockpiles and expectations of stronger global demand.
The Loonie did enjoy some support from higher crude oil and risk appetite every now and then. However, checking the charts of other CAD pairs around this time suggests that the USD/CAD slide was mostly a result of dollar weakness instead of CAD strength.
When crude oil retreated on resurfacing oversupply concerns at the start of February, the oil-related Loonie was sold off. But now that oil is beginning to recover again on positive OPEC compliance data, it seems the commodity and the Canadian dollar are taking a break.
AUD/USD vs. Gold
In contrast, the Aussie and gold are still going strong, moving in lockstep, hand-in-hand, like love birds on Valentine’s Day, celebrating their anniversary.
This was most likely because dollar weakness and market sentiment were the main factors pushing prices around at the start of the year. In fact, this gold and AUD/USD rally has been going on since mid-December last year!Of course there were some road bumps along the way, like that of mid-January or early February when AUD and the precious metal pulled apart for a bit of space. Keep in mind that gold actually benefits from safe-haven flows while the higher-yielding Aussie usually gives up ground when risk aversion is present.
Looking ahead, it looks like this relationship could keep going strong as both AUD/USD and gold are both pulling back from their latest rally.
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.
Ack! This one seems to be on the rocks!
Yen pairs like EUR/JPY were mostly stuck in consolidation for almost the entire January while the S&P 500 index trudged slowly higher. The currency pair broke down then reversed in early February but the stock index was already starting to slide then.
But who can forget the sharp back-to-back declines in U.S. equities a few days back? This was accompanied by yen gains as the Japanese currency snatched risk-off flows away from the U.S. dollar, which also happened to be reeling then.
This goes to show that intermarket correlations aren’t set in stone, and it would help to take note of which ones are holding up well and which ones aren’t.