Intermarket Correlations

let’s first note that the U.S. dollar and gold don’t quite mesh very well.

Usually, when the dollar moves up, the gold falls, and vice-versa. The traditional logic here is that during times of economic unrest, investors tend to dump the greenback in favor of gold. Unlike other assets, gold maintains its intrinsic value or rather, its natural shine.

Gold and AUD/USD Nowadays, the inverse relationship between the Greenback and gold still remains although the dynamics behind it have somewhat changed.

Because of the dollar’s safe-haven appeal, whenever there is economic trouble in the U.S. or across the globe, investors more often than not run back to the Greenback. The reverse happens when there are signs of growth. Take a look at this awesome chart:

Currently, Australia is the third biggest gold-digger… we mean, gold producer in the world, sailing out about $5 billion worth of yellow treasure every year! Gold has a positive correlation with AUD/USD. When gold goes up, AUD/USD goes up. When gold goes down, AUD/USD goes down. Historically, AUD/USD has had a whopping 80% correlation to the price of gold!

Gold and USD/CHF

Gold’s negative correlation with USD/CHF Across the seven seas, Switzerland‘s currency, the Swiss franc, also has a strong link with gold. Using the dollar as the base currency, the USD/CHF usually climbs when the price of gold slides.

Conversely, the pair dips when the price of gold goes up. Unlike the Australian dollar, the reason why the Swiss franc moves along with gold is because more than 25% of Switzerland’s money is backed by gold reserves.

Gold has a negative correlation with USD/CHF. When gold goes up, USD/CHF goes down. When gold goes down, USD/CHF goes up. The relationship between gold and major currencies is just ONE of the many that we will tackle.

Oil Moves with USD/CAD

Oil is the drug that runs through the veins of the global economy as it is a major source of energy. Canada, one of the top oil producers in the world, exports over 3 million barrels of oil and petroleum products per day to the United States. This makes it the largest supplier of oil to the U.S.! This means that Canada is the United States’ main black gold dealer!

Because of the volume involved, it creates a huge amount of demand for Canadian dollars. Also, take note that Canada’s economy is dependent on exports, with about 85% of its exports going to its big brother down south, the U.S. Because of this, USD/CAD can be greatly affected by how U.S. consumers react to changes in oil prices. If U.S. demand rises, manufacturers will need to order more oil to keep up with demand. This can lead to a rise in oil prices, which might lead to a fall in USD/CAD. If U.S. demand falls, manufacturers may decide to chill out since they don’t need to make more goods. Demand for oil might fall, which could hurt demand for the CAD. Oil has a negative correlation with USD/CAD of about 93% between 2000 through 2016.

When oil goes up, USD/CAD goes down. When oil goes down, USD/CAD goes up. To make the correlation clearer, we can invert USD/CAD to show how both markets move pretty much at the same time (i.e., crude oil will gain value with the Canadian dollar while the U.S. dollar falls…and vice versa. Check it out in the chart below: Check it out in the chart

U.S. Dollar And Oil Relationship Is Changing

The explanation for this relationship is based on two well-known premises. A barrel of oil is priced in U.S. dollars across the world. When the U.S. dollar is strong, you need fewer U.S. dollars to buy a barrel of oil. When the U.S. dollar is weak, the price of oil is higher in dollar terms. The United States has historically been a net importer of oil. Rising oil prices cause the United States trade balance deficit to rise as more dollars are needed to be sent abroad.

The former still holds true today, the latter….not so much. Due primarily to the success of horizontal drilling and fracking technology, the U.S. shale revolution has dramatically increased domestic petroleum production.

In fact, the United States became a net exporter of refined petroleum products in 2011, and has now become The largest producer of crude oil overtaking Saudi Arabia and Russia!

According to the Energy Information and Administration (EIA), the United States is now about 90% self-sufficient in terms of total energy consumption. The technological breakthrough of fracking has disrupted the status quo in the oil market, much like how Kylie Jenner’s Lip Kits disrupted the status quo in the cosmetic industry. As U.S. oil exports have increased, oil imports have decreased. This means that higher oil prices no longer contribute to a higher U.S. trade deficit, and actually help to decrease it. As a result, we’ve seen the historically strong inverse relationship between oil prices and the U.S. dollar becoming more unstable.

The United States has become the new swing producer of oil, meaning that its production levels hold the most influence over global oil prices. Before the shale revolution, it was Saudi Arabia. The U.S. may start to trade more like a petrocurrency in the years to come. As the US continues to grow the share of oil exports over imports, revenue from oil will play a greater role in the U.S. economy and the U.S. dollar may start behaving like a petrocurrency….meaning when oil prices go up, so does the currency.

Understanding why the dollar has historically traded inversely to the price of oil and why the correlation has weakened recently can help traders make more informed trading decisions as the global economy continues to evolve.