Forex Supply and Demand Analysis: The Correlation Between Instruments - ForeXposed

Latest

Exposing Forex World

Saturday, February 25, 2017

Forex Supply and Demand Analysis: The Correlation Between Instruments

In the intermarket analysis, we try to see the linkages between markets and specifically the correlation between instruments which is traded. The thing must be understood is, all the instruments traded on the financial markets are valued in U.S Dollars. So there is a similarity of perspective in assessing other forms of investment. For example, if oil prices are decreasing, that means the U.S. Dollar is strengthening.

At this point, we can see what’s currencies have a direct relation with the turmoil of oil prices. Certainly, it is a currency of countries oil exporters.

Some relations between instruments on the financial markets:

  1. Gold Price - AUD/USD and USD Index.

  2. Oil Price - USD/CAD.

  3. 10 Years Treasury Notes (TNX) - USD Index (DXI) and USD/CHF.

  4. S&P 500 (SPX) - USD/JPY and EUR/USD.

  5. Open Interest (COT report) - All major pairs.

  6. Banking Stocks in S&P 500 - USD/CHF.

Look at some pictures below, so you can get an idea of how the relationships between the instruments can be used as additional information in the forex trading activity:

Gold is the investment instruments, historically, used to suppress the risk of inflation/deflation, and a thing to secure the funds when the economy is at uncertain state.

Forex Supply and Demand Analysis: The Correlation Between Instruments

Forex Supply and Demand Analysis: The Correlation Between Instruments

Australia is one of the country's largest producer of gold besides the energy. Therefore, not too surprised if its currency is correlated directly with the gold price.

Look at the H1 picture frame below, how the AUD/USD is weakened, following the drop in gold price.

Forex Supply and Demand Analysis: The Correlation Between Instruments


In contrary, the Dollar Index had reversed correlation with the gold price:

Forex Supply and Demand Analysis: The Correlation Between Instruments


 Ten Year Notes or the US Government Debt give impact to Dollar Index and USD/CHF.

Forex Supply and Demand Analysis: The Correlation Between Instruments

Forex Supply and Demand Analysis: The Correlation Between Instruments

While the American Stock Exchange Index, mainly S&P 500 give significant impact to the movement of some major currency, particularly EUR/USD and USD/JPY.

Forex Supply and Demand Analysis: The Correlation Between Instruments

The last example is one of Sentiment Indicator i.e. Commitment of Traders (COT) issued by Commodity Futures Trading Commission (CFTC) every Friday at 3:30 pm EST.

This report shows a net position, both Commercial, Large Speculator, and Non-Commercial (Small Speculator). This report records the volume of open interest on the futures market and shows how the ‘Big Boys’ play his cards. COT Index shows the reading scale 0 (extreme bearish) - 100 (extreme bullish).

The chart below shows that Large Speculators (hedge funds, etc.) has been doing the selling action on "looney" the last few weeks and COT Index are at level 0, extremely bearish for looney. This means the Canadian Dollar is being in the bottoming process (futures market), On your chart (MT4) is topping, as quoting on the future market is opposite to spot market. Could have been in this process the USD/CAD continued to go up makes a new high, but we have already anticipated the possibility of ‘topping’ on the USD/CAD.

Forex Supply and Demand Analysis: The Correlation Between Instruments

In my opinion, of all instruments which is traded, Sentiment Indicators is the most important. This because a market is a place of human interaction which is often influenced by the condition of psychic-emotional. So it's no wonder the Volatility Index (VIX) is also called the "Fear Index".

The use of Sentiment Indicators is to giving information so that we are ready to take a contrary position from the majority of other forex traders. If all the people doing a ‘selling action’, so who will buy?

This is where the significant role of sentiment indicators showing herd (mass) mentality. Later, we discussed more each correlation of that already mentioned above in more depth.