Intermarket Analysis

Currencies don't exist in isolation. The forex market is deeply connected to bond markets, equity markets, and commodity markets — and understanding those connections gives you an edge that most retail traders completely ignore. When US Treasury yields rise, the dollar typically strengthens. When oil spikes, the Canadian dollar often follows. When global equities sell off, the yen and Swiss franc tend to rally. These aren't random correlations. They're driven by fundamental capital flows that repeat across market cycles.

The Four Markets and How They Connect

John Murphy's intermarket analysis framework identifies four interconnected asset classes: currencies, bonds (interest rates), equities, and commodities. The relationships between them aren't static — they evolve with the economic cycle — but the core dynamics are consistent enough to be tradeable.

Bonds and currencies: Interest rate differentials are the single most important driver of exchange rates over the medium term. When a country's bond yields rise relative to another's, its currency tends to strengthen because higher yields attract foreign capital. Investors sell their home currency and buy the higher-yielding currency to invest in those bonds, creating buying pressure.

The US 10-year Treasury yield and the US Dollar Index (DXY) show a strong positive correlation during most periods. When yields rise (bond prices fall), the dollar strengthens. When yields fall, the dollar weakens. Similar relationships exist for other currencies with their respective government bond yields.

Commodities and currencies: Commodity-exporting countries have currencies that correlate with commodity prices. The logic is straightforward: when commodity prices rise, the exporting country earns more foreign currency, improving its trade balance and strengthening its currency.

• CAD and oil — Canada is the world's fourth-largest oil producer. When WTI crude rises, USD/CAD tends to fall (CAD strengthens). The correlation isn't perfect day-to-day but is very reliable over weeks and months.
• AUD and iron ore/gold — Australia is a massive exporter of iron ore and gold. AUD/USD tracks commodity prices closely, which in turn are heavily influenced by Chinese demand since China is Australia's largest trading partner.
• NZD and dairy — New Zealand's largest export is dairy products. Global dairy prices influence NZD through the trade balance channel.
• NOK and oil — Norway's economy is heavily oil-dependent. EUR/NOK and oil prices show consistent inverse correlation.

Equities and currencies: The equity-currency relationship is primarily about risk sentiment. When global equities rise (risk-on), money flows out of safe-haven currencies (JPY, CHF, USD) and into higher-yielding currencies (AUD, NZD, emerging market currencies). When equities crash (risk-off), the reverse happens.

The S&P 500 and USD/JPY often move together during risk-driven regimes. Both rise when sentiment is positive (stocks up, yen weakens) and both fall when fear takes over (stocks down, yen strengthens as capital flees to safety).

The Risk Spectrum

Currencies sit on a risk spectrum, and understanding where each currency falls helps you anticipate movements during market-wide shifts:

Safe havens (strengthen during fear):

• Japanese yen (JPY) — Japan is the world's largest creditor nation. During crises, Japanese investors repatriate foreign investments, buying yen.
• Swiss franc (CHF) — Switzerland's political neutrality, strong banking system, and current account surplus make CHF a capital haven.
• US dollar (USD) — as the global reserve currency, the dollar benefits from flight-to-safety flows during severe crises, even when the US itself is the source of problems.

Risk-sensitive (strengthen during optimism):

• Australian dollar (AUD) — high yield (historically), commodity exposure, China-dependent
• New Zealand dollar (NZD) — similar profile to AUD but smaller and less liquid
• Emerging market currencies (ZAR, TRY, MXN, BRL) — highest risk sensitivity, most volatile during sentiment shifts

When equities are rallying and risk appetite is high, you want to be long the risk-sensitive currencies against the safe havens (buy AUD/JPY, sell USD/CAD if oil is also rising). When markets are panicking, flip the script.

Practical Intermarket Setups

Divergence trading: The most actionable intermarket signal is divergence — when a currency and its correlated asset move in opposite directions. If oil is rallying but CAD is weakening (USD/CAD rising), something is off. Either oil will correct downward or CAD will catch up to oil's move. You trade the convergence back toward the historical relationship.

Leading indicators: Some markets lead others. Bond yields often move before currencies because bond markets are dominated by institutional investors who react fastest to economic data. If US 2-year yields spike sharply higher on a jobs report but the dollar barely moves, it often catches up in the following hours or days. The yield move leads, the currency follows.

Confirmation filters: Use intermarket data to confirm or reject trade setups from your technical analysis. You see a bullish breakout forming on AUD/USD, but iron ore prices are dropping and the S&P 500 is selling off. The intermarket picture contradicts the technical setup — that breakout is more likely to fail. Skip it.

The Economic Cycle Framework

Intermarket relationships rotate through the economic cycle:

Early expansion: Bond yields start rising from low levels. Equities rally on improving earnings. Commodity prices begin recovering. Risk-on currencies strengthen. The dollar typically weakens as capital flows abroad seeking higher returns.

Late expansion: Bond yields rise further as central banks tighten policy. Commodity prices accelerate (often causing inflation concerns). Equities continue higher but with more volatility. Risk currencies remain strong but gains slow.

Recession: Bond yields fall sharply as central banks cut rates. Equities sell off. Commodities drop on demand destruction. Safe-haven currencies (JPY, CHF, USD) outperform. Risk currencies (AUD, NZD, EM) get hit hard.

Recovery: Bond yields bottom and stabilize. Equities lead the recovery. Commodities start to find a floor. Risk-on currencies begin to strengthen again, and the cycle repeats.

Knowing where you are in the cycle helps you identify which currencies are likely to outperform and which are vulnerable. It's not about timing the cycle perfectly — it's about positioning with the prevailing macro winds rather than against them.

Building an Intermarket Dashboard

Set up a multi-chart layout on your trading platform or use a tool like TradingView to monitor these relationships simultaneously:

• DXY (US Dollar Index) alongside US 10-year yield
• WTI crude oil alongside USD/CAD (inverted)
• Gold alongside AUD/USD
• S&P 500 alongside USD/JPY
• VIX (volatility index) as a risk sentiment gauge

Spend a few minutes each morning reviewing these before you trade. Over time, you'll develop an intuitive sense for the macro environment and whether it supports or contradicts your technical setups.

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