We would like to factor changes in the prices of oil into our inflation and growth expectations and then draw conclusions about the course of US Dollar from them. Above all, oil is just one input among many.
Stocks: Almost everyone is familiar with stocks and the stock markets. Stocks are units of ownership rights that get traded on the stock exchanges. You can take stocks as microeconomic securities rising and falling in response to individual corporate results and prospects.
You can think of individual countries as companies and their currencies as stocks that get traded in the global financial markets. Currencies are essentially macroeconomic securities fluctuating in response to wider ranging economic and political developments. As such there is no intuitive reason that stock market should be related to the forex market.
There was a boom in the Tokyo Stock Exchange a decade back. Many investors wanted to take part in that boom. But in order to invest in Japanese stocks, they needed Japanese Yen (JPY). Heavy buying pressure on JPY made it appreciate. So sometimes a relationship develops between a stock market and a currency for the time being. However, long term correlation studies bear this out that there is no major relationship between stocks and currencies. Major USD currency pairs and the US equity markets over the last five years have almost zero correlation coefficients. However, the two markets occasionally intersect.
For example, when equity market volatility reaches extraordinary levels lie when S&P 500 Index loses 2% in a single day, USD may experience more pressure than it otherwise would have. But there is no guarantee of that. The US stock market may drop on an unexpected hike in the US interest rates while USD may rally on the surprise move.
Bonds: When interest rates are on the rise, at some point, doing business becomes difficult, and when interest rates fall, eventually economic growth is energized. The bond market rules the world. Everything that anyone does in the financial markets anymore is built upon interest-rate analysis.
Financial markets in interest rate futures, Eurodollars, and Treasuries (bills, notes, and bonds) important for all consumers, speculators, economists, bureaucrats, and politicians due to the relationship between rising and falling interest rates.
Bond or fixed income markets have a more intuitive relationship with the forex markets as both are heavily influenced by the interest rate expectations. However, the short term supply and demand fluctuations interrupt most attempts to establish a viable link between the two markets on a short term basis.
Sometimes, the forex markets react first and fastest to the shifts in the interest rate expectations. At other times, the bond markets more accurately reflect the changes in interest rate expectations with the forex market doing the catch up.
As a forex trader, you definitely need to keep an eye on the yields of the benchmark government bonds of the major currency countries to better monitor the expectations of the interest rate market. Changes in the relative interest rates exert a major influence on forex markets.
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