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Forex Market Basic 3

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Currencies and Other Financial Markets

There are various other markets apart from the Forex market. These are not water tight compartments and other markets like oil, gold, stocks etc are interrelated to each other. To understand markets better, one must always study the correlation between two different markets over a period of time. We must remember that all these markets work independently depending on the news, events and sentiments. They have their own independent sentiment. Do these markets interact with each other? Or is there any correlation between them? Let us have a look in detail and then reach to conclusions.

Gold

Gold is generally a hedge against inflation and a store of value in times of economic or political uncertainty. The relationship between the USD and gold is seen to be inverse, the weaker the USD the higher the gold price, and vice versa. However, these trends are shown only in long run while in the short run, each market has its own dynamics and liquidity, which makes short-term trading relationships generally tenuous. Extreme movements in gold prices tend to attract the attention of currency traders and hence influence the dollar generally in an inverse fashion.

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Oil

Some countries are oil producers, so their currencies are positively (or negatively) affected by increases (or decreases) in the price of oil. If the country is an importer of oil, its currency will be hurt by higher oil prices. As per the various correlation studies, it seems that there is no significant relationship to that effect, especially in the short run, which is where most currency trading is focused. The best way to look at oil is with its relation to inflation and impact on overall economic growth. The higher the price of oil, the higher inflation is likely to be and the slower an economy is likely to grow and vice versa.

Stocks

Stocks are microeconomics securities, which rise and fall in response to individual corporate results and prospects, while currencies are essentially macroeconomic securities, which fluctuate in response to wider-ranging economic and political developments. Long-term correlation studies show that there is little or no correlation between the major USD pairs and U.S. equity markets over the last five years. The two markets occasionally intersect, though this is usually only at the extremes and for very short periods.

Bonds

The bond market is the fixed-income market and is generally more intuitively connected to the Forex market because they’re both heavily influenced by interest rate expectations. Sometimes the Forex market reacts first and fastest depending on shifts in interest rate expectations. At other times, the bond market more accurately reflects changes in interest rate expectations, with the Forex market later playing catch-up. Overall, as currency traders, one definitely needs to keep an eye on the yields of the benchmark government bonds of the major-currency countries to better monitor the expectations of the interest rate market.

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