Market Correlation
You'll Master: Understand currency-commodity relationships and intermarket analysis.
Why Study Market Correlation?
Markets are interconnected. Understanding how currencies, commodities, and other markets move together or diverge helps you anticipate price moves, diversify risk, and avoid overexposure.
1. Currency-Commodity Relationships
Commodity Currencies:
Some currencies are closely tied to commodity prices. For example, the Australian Dollar (AUD) often moves with gold, and the Canadian Dollar (CAD) with oil. Understanding these links can help you forecast currency moves.
Examples
- AUD/USD rises when gold prices increase
- CAD strengthens when oil prices climb
- NZD often correlates with dairy prices
2. Intermarket Analysis
Looking Beyond Forex:
Intermarket analysis studies how different markets (stocks, bonds, commodities, currencies) influence each other. For example, a strong US stock market may boost USD/JPY, while falling oil prices can weaken CAD.
Key Relationships
- USD/JPY often rises with US stock indices
- EUR/USD may fall when US bond yields rise
- Emerging market currencies can weaken when commodity prices drop
3. Correlation Coefficient
Measuring Correlation:
The correlation coefficient (from -1 to +1) shows how closely two assets move together. +1 means perfect positive correlation, -1 means perfect negative correlation, and 0 means no correlation.
- EUR/USD and GBP/USD: often strongly positive
- USD/CHF and EUR/USD: often negative
- Check correlations regularly—they change over time!
4. Correlation Checklist
- ☑️ Know which currencies are tied to commodities
- ☑️ Monitor intermarket signals before trading
- ☑️ Avoid overexposure to highly correlated pairs
- ☑️ Use correlation tools to check relationships
- ☑️ Adjust strategies as correlations shift
Practice Zone
Homework:
- Find the current correlation between EUR/USD and GBP/USD
- Track how AUD/USD moves with gold over a week
- Identify a time when oil prices impacted CAD
Next Step: Use correlation insights to refine your trade selection!