Intermarket Analysis – Watch These Too

So far we’ve seen that obviously I take a concentrated look at the major currency pairs, and look to find trends / movements within. The other “futures market symbols” listed yesterday give me the goods on the major commodities such as oil, gold and silver – as well a good look at what I refer to as my “risk barometer” being the SP 500 and the Dow.

Other Things I Monitor:

• APPL (As a market leader – I always keep an eye on movement here).
• XLK, XLE, XLV, XLB, XLI  and the entire family of U.S Market Sector ETF’s in this series.
• EWA,EWC,EWD,EWZ  and the entire family of MSCI Ishares ETF’s in this series.
• $TRAN – I watch the transports.
• FTSE – I watch the London Exchange.
• TLT – Ishares 20 Year Bond Fund.

Considering that I use two separate charting  platforms (one for currency trading and another for stocks and options) this is pretty simple to follow  – as the majority of these are listed in separate “watch lists” within the Think or Swim platform. A quick “click and a glance” and one can easily see movement across a wide range of asset classes.

I spend the majority of my time with the currencies on Metatrader 4, but this is the full list of most “anything and everything else” I make sure to keep an eye on day-to-day.

Next we can have a quick look at how to put some of this information together in order to formulate a reasonable idea of where the market is at – and possibly going next.

Connecting the Dots: Market Correlation Analysis for Currency Trading

Now that we’ve covered the essential instruments I monitor daily, let’s dig into how these seemingly separate markets actually work together to paint a clearer picture for currency trades. The real edge comes from understanding these correlations and using them to confirm or reject potential setups before you pull the trigger.

Risk-On vs Risk-Off: The Foundation of Modern Currency Trading

The SP 500 and Dow aren’t just numbers on a screen – they’re your early warning system for major currency moves. When these indices are pushing higher with strong volume, you’re typically looking at a risk-on environment. This means capital flows toward growth currencies like AUD, NZD, and CAD, while safe havens like JPY and CHF get sold off. The correlation isn’t perfect, but it’s consistent enough to build strategies around.

Here’s where it gets interesting: when the XLK (Technology Select Sector SPDR Fund) is leading the market higher, but emerging market ETFs like EWZ (Brazil) or EWA (Australia) are lagging, you’ve got a divergence that often signals a shift in sentiment before it shows up in the major currency pairs. I’ve seen countless USD/JPY rallies stall out when this exact scenario plays out, even with the Nikkei still grinding higher.

Commodity Currencies and Their Leading Indicators

The commodity complex gives you a massive advantage when trading AUD, NZD, and CAD. But here’s what most traders miss – you need to look beyond just gold and oil prices. The XLB (Materials Select Sector SPDR Fund) often moves ahead of the actual commodity futures, and when it diverges from commodity currencies, pay attention.

Take copper as an example. When industrial metals are strengthening but the XLI (Industrial Select Sector SPDR Fund) is weak, it usually means the rally in AUD/USD or NZD/USD is built on shaky ground. The Aussie dollar might push higher on mining optimism, but if U.S. industrial stocks aren’t confirming that strength, the move often reverses within days.

The FTSE connection is crucial here too. London’s performance often reflects global commodity demand better than U.S. indices because of the heavy weighting of mining and energy companies. When the FTSE is outperforming the SP 500, commodity currencies typically have room to run against the dollar.

Bond Markets: The Ultimate Currency Driver

TLT movements tell you everything you need to know about long-term dollar direction. When the 20-year Treasury fund is selling off hard, yields are rising, and that’s usually dollar bullish across the board. But the devil’s in the details – you need to watch how different currency pairs react to the same yield environment.

EUR/USD tends to be more sensitive to real yields than nominal yields, especially when European bonds are moving in the opposite direction. GBP/USD, on the other hand, often ignores moderate yield moves but reacts violently when TLT breaks major technical levels. The yen crosses are where bond movements really shine – USD/JPY has an almost mechanical relationship with U.S. 10-year yields, but the 20-year often leads the move.

Here’s a pattern I’ve traded successfully for years: when TLT is making new lows but the dollar index is struggling to break higher, look for weakness in EUR/USD or GBP/USD to be temporary. The bond market is usually right, but sometimes currencies need time to catch up.

Sector Rotation and Currency Implications

The sector ETF rotation tells you which currencies are likely to outperform over the medium term. When XLE (Energy Select Sector SPDR Fund) is leading, CAD usually benefits, but watch the timeline – oil stocks often move ahead of the currency by several days or even weeks.

Healthcare’s performance through XLV might seem irrelevant to forex, but it’s actually a great risk appetite gauge. Healthcare is considered defensive, so when it’s outperforming growth sectors while the overall market is rising, it suggests underlying nervousness. This environment typically favors CHF and JPY over growth currencies, even if risk assets are still climbing.

The transportation average ($TRAN) deserves special attention because it’s often the first to signal economic shifts. When transports are weak but currencies like AUD and CAD are strong on commodity strength, that divergence rarely lasts. Economic reality usually wins, and transport weakness eventually shows up in commodity demand.