Forex Learning : You will get a much clearer picture if you can understand how the market interacts with each other. It will be very interesting to observe the relationship between commodities, prices of bonds, stocks and currencies.
In most cycles, there is a general order in which the four markets can move. By looking at all the movements, we will be better able to judge, in what direction will the market move? Because in principle the four markets work together and some are in the opposite direction.
Push and Pull
Let’s see how the prices of commodities, bonds, stocks and currencies interact. When commodity prices rise, the cost of goods will be pushed up so as to increase price movements or inflation. In turn, potential interest rates will also increase.
The relationship between interest rates and bond prices is inversely proportional. Therefore, the bond price will usually decrease when the interest rate rises.
In general, bond prices and stock prices are correlated. When bond prices begin to fall, then the stock price will eventually follow because the cost of borrowing becomes more expensive and the cost of doing business rises due to inflation.
Again, we will see the moment between falling bond prices resulting in falling prices on the stock market.
The currency market has an impact on all markets, but the main focus is more on commodity prices. Commodity prices will affect bond prices and then stock prices.
The US dollar and commodity prices are generally in opposite trends when the dollar declines against other currencies.
Intermarket analysis is not a method that can provide a buy signal or sell signal. However, it provides excellent information to confirm trends and will provide information about potential price reversals.
If commodity prices increase, bond prices have begun to turn lower. It’s just a matter of time to wait for the stock price to fall.
Even so, this is just a kind of “warning” that there will be a trend reversal that might occur in the foreseeable future if bond prices continue and change to a lower level.
Intermarket Analysis Not Successful?
There is always a connection between these markets, but there are times when the correlation mentioned above will not give a good picture.
When the Asian market collapsed in 1997, the US market saw stock prices and bond prices split (stocks fell when bond prices rose, and stocks rose as bonds fell). This violates the positive correlation between bond and stock prices. So why did this happen?
A typical market relationship will be seen when inflation is seen. So, when we move into a deflationary environment, the relationship will shift.
Deflation will generally push the stock market to move to a low level with no potential for stock price growth. On the other hand, bond prices will move higher to reflect lower interest rates (remember, interest rates and bond prices move in the opposite direction).
Effective implementation of intermarket analysis can help you to understand the dynamics of the shifting global economy (learn also about analyzing forex trading ).