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Chapter 4.1
Intermarket Relationships
                            0
In this section, we will be focusing on how the following markets affect
INTERMARKET RELATIONSHIPS                                                       the forex market:
The forex market is the largest global financial market. While no other
financial market can compare to the size of the forex market, these
other financial markets do impact the forex market. For instance, the
                                                                                           Commodity market
U.S. bond market can affect the value of the U.S. dollar (USD) just as




                                                                                Contents
the Japanese stock market can affect the value of the Japanese yen
                                                                                           Bond market
(JPY).

To become a successful forex trader, you will need to learn the                            Stock market
relationships that exist among the world’s financial markets and how
these relationships may affect the currency pairs you are trading.

Oftentimes, you can receive advanced warning of what is going to
happen in the forex market by watching what is happening currently in
other financial markets. For example, if you see the value of gold rising
quickly, you can look for a corresponding rise in the value of the
AUD/USD. Once you know what to look for, you can take advantage
of the same correlations that the large institutional investors are
watching.




                                                                            1
Commodity Market and the Forex Market                                             price of gold goes lower, the value of the Australian dollar also goes
The rise of global demand for commodities has tied the commodity                  lower. While this correlation isn’t perfect, it is significant.
market and the Forex market closer together. Virtually every economy
                                                                                  Paying attention to what is happening in the commodity market during
around the world has to import some of the commodities it consumes.
                                                                                  the next few years can lead you to greater profits in your forex trading.
To buy these commodities, importers must exchange their currency for
                                                                                  Demand from global growth should continue to push commodity prices
the currency of the economy from which they are importing the goods.
                                                                                  higher for years to come. Be prepared to take advantage not only of
This transaction drives the demand for the exporter’s currency higher,
                                                                                  the currencies that will strengthen as commodity prices increase but
which increases the value of that currency. This transaction also drives
                                                                                  also of the currencies that will weaken.
the supply of the importer’s currency lower, which decreases the value
of that currency.

Three of the major currencies—the Canadian dollar (CAD), the
                                                                                  Bond Market and the Forex Market
Australian dollar (AUD) and the New Zealand dollar (NZD)—are closely
                                                                                  Next to the Forex market, the global bond market is the second largest
related to commodity values because they are major commodity
                                                                                  financial market in the world. Governments, institutions and individual
exporters. As the price of commodities rises, the value of these
                                                                                  investors all participate actively in the global bond market, and each
currencies typically rises. As the price of commodities falls, the value of
                                                                                  one of these market participants is looking for the same thing: a
these currencies typically falls.
                                                                                  profitable return on investment.
Each of these commodity currencies, as they are known among forex
                                                                                  Government bonds make up the largest percentage of the global bond
traders, is affected differently by various commodities. For example,
                                                                                  market. These bonds are typically viewed as risk-free investments
the Australian dollar is highly correlated with gold. As the price of gold
                                                                                  because they are backed by the full good will and faith of strong
goes higher, the value of the Australian dollar also goes higher. As the
                                                                                  national governments. However, not all government bonds were
                                                                                  created equal. Some governments pay a higher interest rate for their




                                                                              2
bonds than do others. International investors take these interest rates       Stock Markets and the Forex Market
into account when they are deciding where to invest their money.              Individual investors around the world seem to watch stock markets
Typically, bonds with higher interest rates are more attractive to            more closely than any other market. Stocks are exciting, they have
investors—as long as the economies covering the bonds are relatively          been around for a while and most individual investors can relate to the
stable.                                                                       companies in which they are buying stock. When times are good in the
                                                                              stock market, money flows in. When times are bad and the stock
Investors who wish to buy government bonds must buy these bonds
                                                                              market, money flows out.
with the currency of the represented government. If international
investors wish to buy U.S. government bonds, they must first exchange         Globalization has made it easier for investors from one country to
their currencies for U.S. dollars (USD). This increased demand for U.S.       invest in the stock markets of other countries. If investors see that
dollars (USD) drives the value of the USD higher. At the same time, the       stocks in the United Kingdom are performing well, they will rush to buy
increased supply of international currencies on the market drives the         those stocks. If they see that stocks in Japan are starting to outperform
value of these currencies lower.                                              stocks in Europe, they will take their money out of Europe and put it
                                                                              into Japan.
Knowing which governments offer higher interest rates on their
government bonds and which bonds are gaining popularity among                 To invest in stocks in the United Kingdom, foreign investors must first
international investors will help you know which currencies to buy and        convert their currencies into British pounds (GBP). This increased
which currency to sell. Fortunately for you, the international bond           demand for British pounds (GBP) drives the value of the GBP higher. At
market rarely changes directions instantaneously. Rather, it cycles in        the same time, the increased supply of international currencies on the
longer-term, somewhat predictable trends that you can exploit.                market drives the value of these currencies lower.

                                                                              Forex investors closely watch how the stock markets in major countries
                                                                              are performing.       If the stock market in one country starts




                                                                          3
outperforming the stock market in another country, forex investors
know that other investors will most likely be moving their money from
the country with the weaker stock market to the country with the
stronger stock market. This will drive the value of the currency for the
country with the stronger stock market higher and the value of the
currency for the country with the weaker stock market lower. By
buying the currency from the country with the stronger stock market
into selling a currency from the country with the weaker stock market,
you can potentially make a handsome profit.




                                                                           4
5
Disclaimer
None of the information contained herein constitutes an offer to purchase or sell a financial instrument or to make any investments.
Saxo Bank A/S and/or its affiliates and subsidiaries (hereinafter referred to as the “Saxo Bank Group”) do not take into account y our
personal investment objectives or financial situation and make no representation, and assume no liability to the accuracy or
completeness of the information provided, nor for any loss arising from any investment based on a recommendation, forecast or other
information supplied from any employee of Saxo Bank, third party, or otherwise. Trades in accordance with the recommendations in an
analysis, especially, but not limited to, leveraged investments such as foreign exchange trading and investment in derivatives, can be
very speculative and may result in losses as well as profits. You should carefully consider your financial situation and consult your
financial advisor(s) in order to understand the risks involved and ensure the suitability of your situation prior to making any investment
or entering into any transactions. All expressions of opinion are subject to change without notice. Any opinions made may be personal
to the author and may not reflect the opinions of Saxo Bank.

Please furthermore refer to Saxo Bank's full General Disclaimer: http://www.saxobank.com/?id=193




                                                                    6

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FOREX - INTERMARKET RELATIONSHIPS (4.1)

  • 2. In this section, we will be focusing on how the following markets affect INTERMARKET RELATIONSHIPS the forex market: The forex market is the largest global financial market. While no other financial market can compare to the size of the forex market, these other financial markets do impact the forex market. For instance, the Commodity market U.S. bond market can affect the value of the U.S. dollar (USD) just as Contents the Japanese stock market can affect the value of the Japanese yen Bond market (JPY). To become a successful forex trader, you will need to learn the Stock market relationships that exist among the world’s financial markets and how these relationships may affect the currency pairs you are trading. Oftentimes, you can receive advanced warning of what is going to happen in the forex market by watching what is happening currently in other financial markets. For example, if you see the value of gold rising quickly, you can look for a corresponding rise in the value of the AUD/USD. Once you know what to look for, you can take advantage of the same correlations that the large institutional investors are watching. 1
  • 3. Commodity Market and the Forex Market price of gold goes lower, the value of the Australian dollar also goes The rise of global demand for commodities has tied the commodity lower. While this correlation isn’t perfect, it is significant. market and the Forex market closer together. Virtually every economy Paying attention to what is happening in the commodity market during around the world has to import some of the commodities it consumes. the next few years can lead you to greater profits in your forex trading. To buy these commodities, importers must exchange their currency for Demand from global growth should continue to push commodity prices the currency of the economy from which they are importing the goods. higher for years to come. Be prepared to take advantage not only of This transaction drives the demand for the exporter’s currency higher, the currencies that will strengthen as commodity prices increase but which increases the value of that currency. This transaction also drives also of the currencies that will weaken. the supply of the importer’s currency lower, which decreases the value of that currency. Three of the major currencies—the Canadian dollar (CAD), the Bond Market and the Forex Market Australian dollar (AUD) and the New Zealand dollar (NZD)—are closely Next to the Forex market, the global bond market is the second largest related to commodity values because they are major commodity financial market in the world. Governments, institutions and individual exporters. As the price of commodities rises, the value of these investors all participate actively in the global bond market, and each currencies typically rises. As the price of commodities falls, the value of one of these market participants is looking for the same thing: a these currencies typically falls. profitable return on investment. Each of these commodity currencies, as they are known among forex Government bonds make up the largest percentage of the global bond traders, is affected differently by various commodities. For example, market. These bonds are typically viewed as risk-free investments the Australian dollar is highly correlated with gold. As the price of gold because they are backed by the full good will and faith of strong goes higher, the value of the Australian dollar also goes higher. As the national governments. However, not all government bonds were created equal. Some governments pay a higher interest rate for their 2
  • 4. bonds than do others. International investors take these interest rates Stock Markets and the Forex Market into account when they are deciding where to invest their money. Individual investors around the world seem to watch stock markets Typically, bonds with higher interest rates are more attractive to more closely than any other market. Stocks are exciting, they have investors—as long as the economies covering the bonds are relatively been around for a while and most individual investors can relate to the stable. companies in which they are buying stock. When times are good in the stock market, money flows in. When times are bad and the stock Investors who wish to buy government bonds must buy these bonds market, money flows out. with the currency of the represented government. If international investors wish to buy U.S. government bonds, they must first exchange Globalization has made it easier for investors from one country to their currencies for U.S. dollars (USD). This increased demand for U.S. invest in the stock markets of other countries. If investors see that dollars (USD) drives the value of the USD higher. At the same time, the stocks in the United Kingdom are performing well, they will rush to buy increased supply of international currencies on the market drives the those stocks. If they see that stocks in Japan are starting to outperform value of these currencies lower. stocks in Europe, they will take their money out of Europe and put it into Japan. Knowing which governments offer higher interest rates on their government bonds and which bonds are gaining popularity among To invest in stocks in the United Kingdom, foreign investors must first international investors will help you know which currencies to buy and convert their currencies into British pounds (GBP). This increased which currency to sell. Fortunately for you, the international bond demand for British pounds (GBP) drives the value of the GBP higher. At market rarely changes directions instantaneously. Rather, it cycles in the same time, the increased supply of international currencies on the longer-term, somewhat predictable trends that you can exploit. market drives the value of these currencies lower. Forex investors closely watch how the stock markets in major countries are performing. If the stock market in one country starts 3
  • 5. outperforming the stock market in another country, forex investors know that other investors will most likely be moving their money from the country with the weaker stock market to the country with the stronger stock market. This will drive the value of the currency for the country with the stronger stock market higher and the value of the currency for the country with the weaker stock market lower. By buying the currency from the country with the stronger stock market into selling a currency from the country with the weaker stock market, you can potentially make a handsome profit. 4
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  • 7. Disclaimer None of the information contained herein constitutes an offer to purchase or sell a financial instrument or to make any investments. Saxo Bank A/S and/or its affiliates and subsidiaries (hereinafter referred to as the “Saxo Bank Group”) do not take into account y our personal investment objectives or financial situation and make no representation, and assume no liability to the accuracy or completeness of the information provided, nor for any loss arising from any investment based on a recommendation, forecast or other information supplied from any employee of Saxo Bank, third party, or otherwise. Trades in accordance with the recommendations in an analysis, especially, but not limited to, leveraged investments such as foreign exchange trading and investment in derivatives, can be very speculative and may result in losses as well as profits. You should carefully consider your financial situation and consult your financial advisor(s) in order to understand the risks involved and ensure the suitability of your situation prior to making any investment or entering into any transactions. All expressions of opinion are subject to change without notice. Any opinions made may be personal to the author and may not reflect the opinions of Saxo Bank. Please furthermore refer to Saxo Bank's full General Disclaimer: http://www.saxobank.com/?id=193 6