Intermarket correlations: gold, oil, yields and currencies

No market lives on its own. The price of oil weighs on Canada's economy, US yields attract Japanese capital, appetite for stocks helps the Australian dollar. Intermarket analysis studies these links. It helps you understand why a pair moves when no data has come out, and spot signals by looking at other markets.

What is a correlation?

A correlation measures how closely two assets move together. The coefficient runs from +1 (they always move the same way) to -1 (they always move in opposite directions). Around 0, there's no regular link. It's calculated over a given period, for example daily returns over the last three months.

Commodities: gold, oil and currencies

Gold is priced in dollars. When the dollar strengthens, gold gets more expensive for buyers paying in other currencies, which weighs on demand. That's why XAU/USD often moves opposite to the dollar index.

Gold is also very sensitive to real yields, meaning interest rates adjusted for inflation. Gold pays no interest: when risk-free investments pay a lot after inflation, holding gold has a higher opportunity cost. But in a crisis, gold and the dollar can rise together, because both act as safe havens.

Canada is a major oil exporter. When crude rises, export revenues increase and demand for the Canadian dollar follows. USD/CAD therefore tends to fall when oil rises, since the CAD strengthens. The same logic applies, to a lesser extent, to the Norwegian krone.

This link isn't mechanical. If the Bank of Canada and the Fed are on very different rate paths, the rate gap can outweigh oil for months. Always check whether the link is active over the recent period.

US yields, the dollar and the yen

When US Treasury yields rise, holding money in dollars becomes more attractive. The relationship is especially visible on USD/JPY: when the gap between US and Japanese yields widens, the pair tends to rise, and vice versa.

For a USD/JPY trader, the US 10-year or 2-year yield is as useful as the chart itself. A sharp jump in yields after an inflation release often shows up on the pair immediately. This link can break in a violent risk-off move: the yen then plays its safe-haven role and rises even if US yields stay high.

Stocks and the Australian dollar

The Australian dollar is seen as a risk-on currency. Australia exports a lot of commodities, especially to China, and the AUD benefits from periods of global growth and optimism. It therefore often moves in the same direction as stock indices like the S&P 500.

There are also mechanical correlations between currency pairs. EUR/USD and GBP/USD often move the same way, because the dollar is the quote currency in both and the European economies are linked. EUR/USD and USD/CHF, on the other hand, move in opposite directions: the dollar comes first in one and second in the other. These links are more stable, but they vary too.

Correlations change

This is the most important point of the lesson. A correlation is an average of the past. It depends on the theme driving the market. When inflation is the worry, rates dictate almost everything. When a crisis hits, all risky assets fall together and safe havens rise, creating correlations that didn't exist a few weeks earlier.

A simple method is to compare the correlation over a long period, say one year, with a short period, say one month. If they're close, the link is stable and you can lean on it. If they diverge sharply, the market is switching themes, and that's often when the usual rules of thumb mislead traders.

How to use them in practice

• Confirm: if you're thinking of buying AUD/USD and stock indices are rising too, your idea is consistent with the market.
• Warn: if USD/JPY is rising while US yields are falling, be careful, the move may be fragile.
• Limit your exposure: buying EUR/USD and selling USD/CHF at the same time is largely the same bet against the dollar. Your real risk is doubled.
• Check regularly: recalculate or look up recent correlations instead of relying on a rule you learned once.