Understanding the relationships between different financial markets is a powerful tool in the smart money trading framework. Intermarket relationships and intermarket analysis provide traders with insight into how various asset classes—such as currencies, commodities, bonds, and equities—interact with one another. These relationships reveal shifts in market sentiment, institutional positioning, and liquidity flows, helping traders make more informed decisions.
This article explores how intermarket analysis works, the key relationships between different markets, and how traders can leverage these insights to align with institutional order flow.
What is Intermarket Analysis?
The intermarket analysis involves studying the correlation and interplay between multiple markets to identify trends and shifts in economic conditions. No market operates in isolation—currencies, commodities, stocks, and bonds all influence each other. By tracking these interactions, traders gain a deeper understanding of how money flows between asset classes and how changes in one market impact another.
This type of analysis allows traders to:
- Identify leading indicators of potential market movements.
- Align with institutional liquidity flows by understanding correlations.
- Avoid isolated decisions based on a single market, providing a macro-level perspective.
Key Intermarket Relationships to Watch
- Forex and Bonds (Currency-Bond Relationship)
- How It Works: The bond market reflects the interest rate environment, which directly affects currency values. For example, higher bond yields in a country typically strengthen that country’s currency as investors seek higher returns.
- Application: Watch for changes in U.S. Treasury yields to anticipate moves in USD pairs. A rise in U.S. bond yields often boosts the USD, while a decline weakens it.
- Commodities and Currencies
- How It Works: Some currencies are commodity-dependent, meaning they are heavily influenced by the price of certain raw materials.
- Examples:
- AUD/USD: Strongly correlated with gold and iron ore prices.
- USD/CAD: Closely follows the price of crude oil.
- Examples:
- Application: If gold prices are rising, the Australian dollar (AUD) is likely to strengthen. Similarly, falling oil prices can weaken the Canadian dollar (CAD).
- How It Works: Some currencies are commodity-dependent, meaning they are heavily influenced by the price of certain raw materials.
- Equities and Bonds (Risk-On vs. Risk-Off)
- How It Works: Stocks and bonds generally have an inverse relationship. In risk-on environments, investors favor equities, seeking higher returns. In risk-off environments, they shift toward bonds for safety.
- Application: During periods of economic uncertainty, institutional flows into bonds signal a risk-off sentiment, often leading to declines in stock indices like the S&P 500. Conversely, rising equities may indicate risk appetite and weaken safe-haven currencies like the JPY and CHF.
- Gold and USD (Inverse Correlation)
- How It Works: Gold and the U.S. dollar typically have an inverse relationship. When the dollar strengthens, gold prices tend to fall, as gold becomes more expensive for holders of other currencies. Conversely, a weaker dollar drives demand for gold as an alternative store of value.
- Application: Monitor the DXY (U.S. Dollar Index) for shifts in USD strength to anticipate gold price movements.
- VIX and Forex Market Volatility
- How It Works: The VIX (Volatility Index) measures the market’s expectation of future volatility, primarily in equities. When the VIX rises, it indicates fear and uncertainty, prompting flows into safe-haven assets like the JPY or USD.
- Application: A rising VIX can serve as a leading indicator for potential rallies in safe-haven currencies and declines in risk-sensitive assets.
How to Use Intermarket Analysis in Trading
By tracking intermarket relationships, traders can position themselves alongside institutional flows, aligning with macroeconomic trends. Below are strategies for using intermarket analysis to improve trade setups and precision.
1. Confirm Trade Setups with Correlation Analysis
- Use intermarket relationships to validate your trades. For example, if you’re planning to go long on AUD/USD, check if gold is also trending upward to confirm alignment.
- Conversely, if the currency and its correlated commodity diverge, it could signal institutional repositioning or potential market manipulation.
Course Bundle
Up To 50% Off
Access all courses with a once-off purchase.
Benefits
2. Monitor Yield Spreads for Currency Trends
- Track the difference between two countries’ bond yields to anticipate currency movements. For instance, if U.S. yields rise faster than European yields, it suggests USD strength against the EUR.
- Use this information to align your trades with interest rate differentials and bond market expectations.
3. Trade Risk-On and Risk-Off Sentiment
- Use intermarket analysis to gauge risk sentiment.
- In a risk-on environment, focus on buying risk-sensitive assets like equities or currencies such as AUD, NZD, or CAD.
- In a risk-off environment, prioritize safe-haven trades such as JPY, CHF, or gold.
4. Align with Seasonal Trends and Institutional Flows
- Many intermarket relationships follow seasonal patterns. For example, oil demand typically rises in the winter, supporting CAD strength, while gold may rally during periods of inflationary pressure.
- Look for end-of-quarter or end-of-month rebalancing across different asset classes, which can create high-probability setups.
Tools for Intermarket Analysis
- TradingView: Offers customizable charts to compare multiple markets side by side.
- Economic Calendars: Use these to track key events such as FOMC meetings and NFP releases, which impact multiple markets.
- DXY and VIX Indices: Monitor these indices to assess USD strength and volatility expectations.
- Bond Yield Data: Keep track of U.S. and international bond yields(such as US 10-Year Treasury Bond Note Yield ) to anticipate currency movements.
Common Mistakes to Avoid
- Relying on One Market:
- Always use intermarket relationships as part of a broader trading plan. Don’t make decisions based solely on a single market’s movement.
- Ignoring Market Context:
- Pay attention to the macroeconomic environment. Relationships between markets can shift during periods of high uncertainty, such as geopolitical crises.
- Misinterpreting Correlations:
- Remember that correlations are not static. Monitor them over time, as relationships between markets can weaken or strengthen depending on global conditions.
Conclusion
Intermarket relationships and Intermarket analysis are invaluable tools for traders who want to trade in alignment with institutional flows. By understanding how different asset classes interact, you can anticipate price movements, confirm trade setups, and avoid false signals.
Incorporate these principles into your trading strategy, using tools like bond yields, commodity prices, and equity indices to gain deeper insight into market sentiment. With practice, Intermarket analysis will become a powerful component of your trading arsenal, helping you trade with greater precision and confidence in all types of market conditions.
