Intermarket Analysis: How Assets Influence Forex
Currency markets don't exist in isolation. Stocks, bonds, commodities, and forex are interconnected through capital flows and risk sentiment. Professional traders monitor these relationships to anticipate currency moves before they happen.
Key Intermarket Relationships
Stocks & Risk Currencies
Relationship: Positive correlation. When equities rally, risk appetite increases, strengthening AUD, NZD, CAD.
Example:
S&P 500 rallies 5% → Risk-on sentiment → Capital flows to higher-yielding currencies → AUD/JPY typically rises.
Bonds & USD
Relationship: Treasury yields drive USD. Rising yields = stronger USD (attracts foreign capital seeking higher returns).
Example:
US 10Y yield rises from 4% to 4.5% → Foreign investors buy US bonds → Must buy USD to do so → EUR/USD falls.
Gold & USD
Relationship: Negative correlation. Gold and USD both serve as safe havens, but gold rises when real yields fall or inflation fears increase.
Example:
US real yields fall → Gold rallies → Inflation concerns rise → USD may weaken against commodities but strengthen as safe haven vs EUR.
Oil & CAD/NOK
Relationship: Positive correlation. Canada and Norway are major oil exporters. Rising oil prices boost their terms of trade and currencies.
Example:
Oil rallies from $70 to $85/barrel → CAD strengthens vs USD → USD/CAD falls.
Advanced Indicators: Quantifying Risk Sentiment
Beyond basics, professional traders use quantitative indicators to measure risk sentiment and predict currency moves.
VIX (Volatility Index)
Measures expected stock market volatility. Often called the "fear gauge."
• VIX below 15: Risk-on (AUD, NZD, CAD strong)
• VIX 15-20: Normal (mixed sentiment)
• VIX above 25: Risk-off (USD, JPY, CHF strong)
Credit Spreads (HY-IG)
Difference between high-yield (junk) and investment-grade bond yields.
• Tightening spreads: Risk-on
• Widening spreads: Risk-off (credit stress)
• Leading indicator for carry unwinds
Yield Curve Slope
10Y yield minus 2Y yield. Measures growth expectations.
• Steepening: Growth optimism (USD strength)
• Flattening/Inversion: Recession fears (USD mixed—safe haven vs rate cuts)
Commodity Prices
Broad commodity indices reflect global growth and inflation.
• Rising: Supports commodity currencies (AUD, NZD, CAD, NOK)
• Falling: Signals weak growth (bearish for commodity FX)
Niche Scenarios & Special Situations
Some market environments create unique currency behaviors that don't follow standard rules:
Conflicting Signals
Scenario: Fed hiking (bullish USD) but stocks crashing (risk-off bearish USD).
Resolution: USD typically strengthens as safe haven, but less than if stocks were also rising. Watch which force dominates—usually risk sentiment wins short-term, rate differentials win medium-term.
Central Bank Intervention
Scenario: Bank of Japan intervenes to defend JPY (buying JPY, selling USD).
Trading approach: Interventions cause short-term spikes but rarely change trends. Fade the intervention if fundamentals still support the original direction.
Geopolitical Shocks
Scenario: War, elections, trade conflicts create uncertainty.
Currency impact: Flight to safety (USD, JPY, CHF rally). Once initial shock passes, fundamentals (rates, growth) reassert. Don't fight the trend, but recognize geopolitical premiums fade.