Mastering forex through stock, commodity, and other correlations
The foreign exchange market, with its daily turnover of over $7.5 trillion, doesn’t exist in a vacuum. It’s the central nervous system of the global economy, intricately wired to every other major financial market. For a trader, understanding these connections isn’t just academic—it’s a practical superpower. It enables you to anticipate movements, confirm signals, and develop a more robust, multidimensional trading strategy.
Let’s unravel this web by examining the key relationships between the Forex market and other major markets.
Forex and the stock market correlation
This is one of the most powerful and observable correlations in modern finance.
- The mechanism: It all revolves around global risk sentiment. When investors are optimistic about the global economy, they seek higher returns. This “Risk-On” environment sees money flowing out of safe-haven currencies and into growth-oriented assets like stocks and the currencies of commodity-exporting nations.
- Example: The AUD/JPY and the S&P 500.
- AUD (Australian Dollar): A classic “risk” or “growth” currency, heavily tied to China’s economy and global commodity demand.
- JPY (Japanese Yen): A premier “safe-haven” currency due to Japan’s net creditor status and low-interest-rate environment.
- The correlation: When the S&P 500 (a key global stock index) rallies, signalling risk-on, traders often buy AUD/JPY. When the S&P 500 sells off in a “Risk-Off” panic, traders unwind these positions, selling AUD and buying JPY, causing AUD/JPY to fall sharply.
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The takeaway: Don’t just watch currency pairs in isolation. A sudden drop in global stock indices can be your early warning sign for a strengthening Yen or Swiss Franc (CHF).
Forex and the commodity market: the direct link
Certain currencies are so tied to their nation’s primary exports that they are dubbed “commodity currencies.” Their value often moves in lockstep with specific commodity prices.
- The mechanism: A country’s trade balance is a core driver of its currency’s value. When the price of its key export rises, the country earns more foreign revenue, increasing demand for its currency.
- Key pairings:
- USD/CAD and oil: Canada is a major oil exporter. When crude oil prices rise, the Canadian economy benefits, and the CAD tends to strengthen, causing the USD/CAD pair to fall.
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- AUD/USD and iron ore/gold: Australia is a mining giant. Rising iron ore (its biggest export) or gold prices typically boost the AUD, causing AUD/USD to rise.
- NZD/USD and dairy: New Zealand’s economy is heavily dependent on dairy exports. Strong global dairy auction prices often lead to a stronger NZD.
The takeaway: If you’re trading a commodity currency, your fundamental analysis must include a chart of its linked commodity.
Forex and the bond market: the interest rate relay
This relationship is more nuanced, but it is the foundation of long-term currency trends. It’s all about capital flows seeking the best return.
- The mechanism: Government bond yields (especially the 10-year benchmark) are a direct reflection of market expectations for interest rates. Higher yields attract foreign investment, which requires converting other currencies into the local one, thereby increasing its demand and value.
- Example: The US dollar and treasury yields.
- If the U.S. Federal Reserve signals a hawkish stance (hinting at future rate hikes), the yield on U.S. 10-Year Treasury bonds will often rise.
- International investors, seeking this higher return, will sell their local assets and buy U.S. Treasuries. To do this, they must sell EUR, JPY, or GBP and buy USD.
- This capital inflow causes the U.S. Dollar Index (DXY) to strengthen.
The takeaway: A widening interest rate differential between two countries (e.g., the U.S. raising rates while the EU holds steady) is one of the strongest fundamental drivers for a currency pair (e.g., EUR/USD trending down).
Forex and cryptocurrencies
The relationship here is still evolving but is increasingly significant.
- The mechanism: Cryptocurrencies, particularly Bitcoin, are often framed as an alternative to traditional fiat money. In times of extreme risk-off sentiment or specific crises (like fears of capital controls or hyperinflation in a country), money can flow from certain fiat currencies into crypto.
- The correlation: The relationship is not as stable as others. Sometimes, Bitcoin acts as a “risk-on” asset, moving with stocks. Other times, it behaves as a “safe-haven,” especially against currencies perceived as weak. For example, during the 2023 banking crises, we saw capital move into Bitcoin as a decentralized alternative, potentially weakening demand for traditional safe-havens like the JPY or CHF in that specific context.
The takeaway: While not a direct correlation, the crypto market is a new variable that can siphon liquidity and influence sentiment in the traditional Forex space, especially during periods of systemic fear.
Conclusion: trade with a wider lens
By understanding these intermarket relationships, you transform from a currency trader into a global macro trader. You begin to see the full picture:
- A spike in oil prices? Check USD/CAD for a potential short.
- The S&P 500 is plunging 3%? Look for buying opportunities in JPY pairs.
- Bond yields surging in the UK? EUR/GBP might be poised for a downtrend.
Your charts will tell a richer story, and your trading decisions will be informed by the symphony of the global markets, not just a single instrument.
5 top broker reviews for multi-asset traders
Choosing the right broker is crucial for acting on these intermarket insights. Here are five excellent options, selected from your list, that provide access to Forex, stocks, commodities, and indices.
eToro
- Best for: CopyTrading and Social Investing.
- Why it’s interesting for intermarket traders: eToro’s flagship feature is its social trading platform. You can see what other traders are doing and automatically copy the portfolios of top performers across Forex, stocks, crypto, and commodities. This is a fantastic way to learn how experienced traders navigate these correlations.
- Key specs:
- Min. deposit: $50
- Platforms: Own Social Platform, MT4, MT5
- Regulation: FCA, CySEC, ASIC
Risk disclaimer: eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 61% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
This communication is intended for information and educational purposes only and should not be considered investment advice or investment recommendation. Past performance is not an indication of future results.
Copy Trading does not amount to investment advice. The value of your investments may go up or down. Your capital is at risk.
Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you should not expect to be protected if something goes wrong. Take 2 mins to learn more.
eToro USA LLC does not offer CFDs and makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication, which has been prepared by our partner utilizing publicly available non-entity specific information about eToro.
AvaTrade
- Best for: Automated Trading and Diverse Platform Choice.
- Why it’s interesting for intermarket traders: AvaTrade offers access to ZuluTrade, a powerful social and copy-trading platform, alongside MT4 and MT5. This allows you to automate strategies based on intermarket signals or follow traders who specialize in this approach. Their wide range of assets is perfect for executing correlated trades.
- Key specs:
- Min. deposit: $50
- Platforms: MT4, MT5, WebTrader, ZuluTrade
- Regulation: Central Bank of Ireland, ASIC, FSCA, CySEC
XM Group
- Best for: Beginner-friendly access and ultra-low minimum deposit.
- Why it’s interesting for intermarket traders: With a $5 minimum deposit, XM is one of the most accessible brokers for traders who want to test intermarket strategies with minimal capital. They offer a full suite of educational resources and tools on MT4 and MT5, helping new traders understand the very correlations discussed in this article.
- Key specs:
- Min. deposit: $5
- Platforms: MT4, MT5, WebTrader
- Regulation: FCA, CySEC, ASIC, IFSC
Pepperstone
- Best for: Low-Cost, High-Speed Execution.
- Why it’s interesting for intermarket traders: For traders who rely on quick execution to capitalize on short-term intermarket moves (e.g., a sudden drop in the S&P 500), Pepperstone is a top choice. Their raw spread accounts and superior trade execution on MT4, MT5, and cTrader ensure you get in and out of trades at the desired price with minimal cost.
- Key specs:
- Min. deposit: $0 (Not specified, often $0 or $200)
- Platforms: MT4, MT5, cTrader
- Regulation: FCA, ASIC, CySEC, DFSA
FP Markets
- Best for: Institutional-Grade Trading Conditions.
- Why it’s interesting for intermarket traders: FP Markets is renowned for its true ECN pricing and tight raw spreads, appealing to serious retail traders and scalpers. When trading correlated assets, every pip counts. Their access to deep liquidity and fast execution on MT4/MT5 and cTrader makes them a prime broker for implementing sophisticated, multi-asset strategies.
- Key specs:
- Min. deposit: $100
- Platforms: MT4, MT5, cTrader
- Regulation: ASIC, CySEC, FSCA
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