All global markets are related somehow, but which ones should you watch to become a better Forex trader? The obvious one is interest rates. When interest rates are higher in a country, it is good for that currency because money flows into that country to get paid the higher rate. But interest rates do not change that often and are easy to track.
The question then becomes, what are the important markets to watch that can affect the daily fluctuations in currency pairs? In this post, I will give you three markets to watch and which currency pairs they influence.
Before we get into it, remember that trading is not an exact science. You need to observe these statements for yourself in real market conditions and draw your own conclusions. They are generally what influences markets, but there are many different things that factor into the price of a currency pair. It is up to you to determine when a price move is being driven by one of these other market and when it is not.
Crude Oil
Crude powers the world and it is no wonder that it's price affects the world's currencies. Pay particular attention to countries that rely on heavily on oil imports and exports.
The currency pair that is most sensitive to fluctuations in oil is the CAD/JPY. The reason is that Canada's economy relies heavily on oil exports and Japan imports almost all of it's oil.
When oil gets expensive, it is good for the Canadian economy and bad for the Japanese economy and the pair goes up. When the price of oil falls, it has the opposite effect on the pair. When these individual currencies are a part of other currency pairs, the price of oil does have an effect on the pair, but not as much as with the CAD/JPY.
Gold
The yellow stuff is considered a safe haven when things start to get crazy in the financial markets. But it's price also has an effect on countries that export and import a lot of gold. Of particular note is Australia, which is one of the largest gold exporting countries in the world.
The prevailing trend of gold price should always be taken into account whenever trading a pair that involves the Australian dollar. Remember that when the AUD is listed first in the currency pair, such as in the AUD/JPY, an upward move in gold, will have add an upward bias on the currency pair. If the AUD is the second pair, like in the EUR/AUD, an upward trend in gold will give the pair a downward bias.
US Stock Market
Watching US stocks and also give you some clues as to the direction of the market. The general concept is that when US stocks do well, that attracts interest from foreign investors, who convert their currencies to US Dollars to purchase US stocks, which is good for the US Dollar. Conversely, when US stocks are not doing well, foreign investors sell their stocks, putting downward pressure on the US Dollar.
So keep this in mind when trading USD pairs. The correlation may not be high, but watch for long trends in the US stock market. The stronger the trend, the more likely foreign money will start to move in or out of US Dollars.
There may be similar correlations with other stock markets, such as in the UK, so do some research and put in some screen time watching these markets and how the move, relative to each other. Chris Lori also mentions is that watching Dow futures before the US market open can give you a clue as to where AUDJPY is going to go for the day.
How To Keep Tabs On These Markets
There are several ways that you can keep track of these markets. One way is to continually check a site like Bloomberg or Reuters to see what is going on. It is not hard to do, but I forget many times.
Another way to do it is to add the charts to TradeInterceptor on your phone. Here is what TI looks like on my phone and the non-forex markets that I am tracking. Again, I usually check it a couple of times a day, but sometimes I do forget.
So it is nice to have a backup. My solution is to get free email updates from INO. It makes it easy to scan what is going on in the markets during the day. If you want, they have an in-depth analysis of each market in the email, but I usually just read the summary of how the markets did for the day, at the top. Oil is a little further down in the email.
There may be other ways that work better for you, but this is what I have found most convenient. Again, it cannot be stressed enough, but these are just clues as to what the currency markets might do next. You have to determine for yourself if a currency pair is currently being heavily influenced by one of these three factors, or not. I hope that this post helps you put some of the pieces together when it comes to seeing the bigger picture in currency trading.
Are there any other intermarket correlations that you have found particularly useful? Let us know in the comments below!
Disclaimer: I do get a commission if your purchase or sign up for services mentioned in this post. However, I only recommend them because I find them useful and the proceeds go towards supporting my work and a portion goes towards my charity partner.
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Hey Hugh,
Shawn again, Just wanted to get your insight as to if you have found these markets to be leading indicators or lagging? I understand there is never a perfect indication for market movements but it important to know.
I appreciate you sharing this with us.
Hi Shawn,
It really depends on the market conditions. You have to to watch price action and see if these markets are leading price and thus would be a good indicator in the near term. It depends on what is influencing the price a the moment.
Hope that helps.
Cheers,
Hugh