Intermarket Analysis Strategy

Intermarket Analysis involves analysing multiple asset classes. The objective is to determine how one asset class impacts on another.

Asset classes have been driven by one another for many years but it is particularly more significant in the present global market.

As Forex traders we should never look at currencies in isolation. Instead we should look at equities, bonds and commodities to determine their impact on specific currencies.

Today we will look at the Dollar Index which is a weighted average of a basket of multiple currencies. The greatest weight is given to the Euro so if we know where price is heading in the Dollar Index it is likely that the Euro will head in the opposite direction.

The Canadian dollar edged higher on Monday against its U.S. counterpart as prices of oil reversed earlier losses, while investors braced for an expected U.S. interest rate hike this week.

U.S. crude CLc1 prices were up 0.04 percent at $48.51 a barrel. Oil had hit an earlier three-month low as rising U.S. inventories and drilling activity offset optimism over the Organization of the Petroleum Exporting Countries’ efforts to restrict crude output

For those who are not familiar there is a positive correlation between the price of oil and the Canadian Dollar. Canada is one of the largest producers of oil and the biggest supplier to the US, therefore there is a large demand for Canadian Dollars.

We like to trade USDCAD because the price of oil can give us clues as to whether to be bullish or bearish loonie.

Oil actually has a negative correlation with USDCAD, to show you the close correlation I have inverted Crude Oil over the currency pair.

So when you are looking to trade the Canadian Dollar, have a look at Oil, if your analysis aligns it can provide confluence and high probability trades.

The dollar has risen today, bolstered by an expected interest rate increase by the U.S. Federal Reserve this week and helped by political risks in Europe amid Dutch and French elections that have pressured European currencies.

But also buoying the dollar’s outlook, is data showing that U.S. producer prices rose more than expected in February and the year-on-year gain was the largest in nearly five years.

In particular a key gauge of underlying producer price pressures that excludes food, energy and trade services increased 0.3 percent in February, the biggest gain since April 2016. The so-called core PPI rose 0.2 percent in January.

A stronger PPI is bullish for the currency and also the likelihood of a stronger CPI.

Its the day we have been waiting for, don’t we just love Yellen!!

I will not be posting any charts pre fed but instead give a quick news recap. The markets are generally choppy so lets hope for decent price action post fed.

I believe the rate hike is fully priced in but what investors will be looking at is the Fed’s path moving forward.

The dollar was subdued in European trade on Wednesday, with the Federal Reserve expected to raise U.S. interest rates and investors looking for clues on future Fed monetary policy.

The Bank of Japan also began a two-day monetary policy meeting on Wednesday. It is expected to hold its policy steady and stress that inflation is nowhere near levels that justify talk of withdrawing its massive stimulus

British Prime Minister Theresa May won parliamentary backing on Monday to begin the process of leaving the European Union, as Scotland considered another referendum on independence from the UK

The euro edged up , as concern about Wednesday’s Dutch parliamentary election was offset by market speculation the European Central Bank may be ready to wind down its stimulus programme.

The Canadian dollar strengthened on Wednesday against its U.S. counterpart as oil prices rallied, but gains for the loonie were restrained ahead of a potential Federal Reserve interest rate hike.

Lets hope for some clarity on future price action post Fed

Well no surprise of the rate hike but as I guessed what moved the market was the Feds intention moving forward.

The dollar has sank to a one-month low, while some surprise hints on the chances of a rise in UK interest rates drove sterling higher as investors digested the fallout of a second rise in U.S. rates in three months.

Investors snapped up the greenback at the start of European trade, judging it looked cheap after sharp falls following the U.S. Federal Reserve’s failure to point aggressively to further rises in the official premium for holding the currency.

But the dollar struggled to make more progress through the European morning and waned as New York traders arrived at their desks.

The euro was also buoyed by a Dutch election defeat for far-right leader Geert Wilders which eased broader fears of a populist drift in European polls this year.

Yet the mood was still edgy and there was buying of the market’s favourite safe havens for capital. The Swiss franc gained almost half a percent against the euro while the yen inched back into positive territory, touching a more than two-week high.

We are long EURUSD but we need to keep a close eye on how best to manage the position. We will be looking at the Dollar Index for clues as to how much further upside potential Euro has.

The Dollar Index has found support at a key level however, the move down appears impulsive and has the potential for further weakness.

Remember a weak Dollar Index often means a strong EURUSD. The Dollar Index is a weighted basket of currencies with the Euro making up the largest percentage.

The Russian rouble has weakened slightly today, coming off five-week highs as oil prices ticked lower.

The rouble eased against the euro as on Friday after the central bank trimmed rates.

The bank lowered the key rate to 9.75 percent and said it would further cut rates gradually. Such rhetoric supported the rouble, offering investors hope that Russian assets would continue to deliver high yields for some time.

Elvira Nabiullina, the central bank’s governor, also supported the Russian currency by saying that the rouble could be overvalued by less than 10 or 12 percent, contradicting earlier statements to that effect from the finance ministry.

The rouble and the stock market came under pressure from lower prices for oil, Russia’s key exports. Brent crude futures LCOc1 were down 0.7 percent to $50.45 a barrel.

Below you can see the EUR against with RUB with Brent overlaid

The relationship between oil and the rouble is one of the strongest in the currency market. Swings in oil prices impact a wide range of financial assets but track most closely to the rouble.

The rouble famously plunged to an all-time low around 80 to the dollar around December 2014 as oil prices tumbled below $60 a barrel, after the Russian central bank said it would allow the currency to float freely

The Aussie has taken a battering in recent trading mainly due to weakening global sentiment and a fall in the price China has to pay for its iron ore.

The dip in iron ore prices also impacted CAD the other high risk currency. With the price of oil making recent new lows can we see further weakening of the CAD?

The chart below shows the AUD and Iron Ore Futures contract overlaid. I believe both are at a key levels and have the potential to break lower

The Dollar Index rose against a basket of major currencies after news that European Central Bank policymakers were wary of making any changes to their policy message in April pressured the euro.

The chart below shows Dollar Index. I do not like calling tops and bottoms but if the Dollar has indeed carved out a low can we assume the Euro will fall further?

As the Euro makes up the largest percentage of the Dollar Index, if one falls the other is likely to rise and vice versa.

You would be brave to assume the Dollar Index has formed a low right now. As corrections can be complex I like to see further evidence before considering longs.