Intermarket analysis is a relationship, or a measurable correlation between four major asset classes: stocks, bonds, commodities and currencies.
The majority of forex traders assume that currency markets move in isolation from all the other capital markets... This is entirely wrong as the foreign exchange market underlies every other market in the world, thus creating a complex network of intermarket relationships which dictate the ultimate flow of capital from one market to another.
Understanding these relationships can help you determine the stage of the investing cycle, select the best performing sectors and avoid the worst.
It is an extremely valuable tool for long-term analysis!
The relationship we are focusing today is the between USOIL and USD/CAD.
Why does this relationship exist?
Trends in commodities and the U.S. Dollar tend to be negatively correlated, this intermarket relationship implies that if the U.S. Dollar has been falling recently, that fact is seen as bullish for commodity prices (as shown on the chart).
The price of oil and the value of the Canadian Dollar tend to be positively correlated. This relationship is due to Canada’s status as one of the world’s top oil exporters, selling roughly two million barrels of oil each day to the United States alone. Rising oil prices will therefore tend to reduce the USD/CAD exchange rate as the Canadian Dollar strengthens.
You can clearly see from looking at the chart below that a long-term intermarket relationship is present, one which is negatively correlated.
To round off this post I truly hope this explained the use of intermarket analysis, there are numerous relationships which you can exploit and use to benefit your own trading.
I am available via private message for any questions you may have.
Comment
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Here is another example using XAU/USD and AUD/USD on the weekly chart.
Why does this relationship exist?
The price of gold and the value of the Australian Dollar tend to be positively correlated. Australia is the third largest gold producer in the world!
The price of gold and the value of the U.S. Dollar tend to be inversely correlated. This is because investors tend to sell paper fiat currencies like the U.S. Dollar in favour of holding hard assets in times of economic crisis.
I guess you can spend time trying to understand intermarket analyses and how it affects specific pairs, because in reality not all pairs react thesame to intermarket analyses or you can just learn how to analyse each market specifically and professionally which will not matter whether it has an intermarket correlation to another asset or not and also be right.
LewisGlasgow
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@magbrr, it all depends on how you use it to your advantage, personally I would use intermarket analysis to confirm long-term trends.
magbrr
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@lewglasgow, yip. You're right. However I find correlation analyses very temporal in nature and subject to sudden and vicious changes. For example about 12 years ago there was an intermarket correlation between Gold and the Euro i.e. if Gold prices rose so did the Euro and vice versa and many forex traders were encouraged, by several educators at the time, to jump on the back of this fact when taking positions. But at around 2008 that correlation was suddenly and severely shaken and most traders who based their method of analyses on that kind of intermarket correlation were really un-anchored and severely beaten with no where to turn. I since learned that there are more permanent and decisive ways to see the market clearly which allows the trader to analyse each market as a unique entity. Traders who steered clear of inter-market analyses in 2008 were never hit by the advent of the impending mis-correlation between Gold and the Euro. Infact to my greatest amazement some of them were actually expecting the mis-correlation to happen at exactly when it did and had exited their positions about 6 months before. It's amazing!
LewisGlasgow
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@magbrr, I agree relationships are not to be depended on as they can and will eventually break over time! Yes this is why I focus entirely on individual markets when analysing charts but this post is for those who may find it beneficial to their trading. Thank you for sharing with everyone :)
RandomDane
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Thank you for sharing your knowlegde! Keep it up :)
LewisGlasgow
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@RandomDane, thanks man, there's a lot more on the way!
CelineUrrangGjersvik
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Since I´m quite new at trading, I found this really helpful! Thank you for sharing, I´m defiantly going to look further into intermarket analysis.
I have noticed this relationship with cotton in Australia. The parity price lingers AU450-$525 per 500 lb bale
Softs dip (USD strengthens) but parity is roughly maintained coz AUD slips against the USD
Currently Cotton is $0.7769 / lb FX is $0.7675 := AUD 101.25
But which leads?
Do commodities fall because the USD is strong (favoured) (commodity demand falls due to higher prices) or does currency rise because commodity prices are pushing lower (Supply side parity ie oversupply creating currency demand)
In the short term there is no perceived arbitrage, but I agree with your use as a medium to longer term trend view.
... just my 2c worth
LewisGlasgow
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@Oh_If_Only, thanks for sharing with everyone! I'm definitely gonna check that out :) being perfectly honest I do not know but I would like to know the answer to your scenario.