Intermarket correlations have something to do with the connection that every asset has with one or more other assets. It isn’t really as hard as it sounds, and the correlations could be easily understood. Let’s start the discussion!
Gold and AUD/USD
The first thing you have to remember is that the relationship between the gold and USD is inverse in manner. That means that if the gold appreciates in value, the dollar plummets down. If the dollar, on the other hand, sees a good day, the gold feels down and out.
The idea behind such phenomenon is that economic unrests and uncertainties usually compel investorsto ditch their dollar holdings and turn to gold for safe haven, since the precious metal retains its shine and intrinsic value.
However, while this principle holds true for most USD cases, it doesn’t really apply to the AUD/USD currency pair. The dynamics have already changed.
For many investors, having dollar holdings feels reassuring. That means that investors will still fall back on the dollar during economic troubles. Sometimes the opposite occurs when they see signs of growth in the economy.
At present, Australia ranks as the third biggest gold producer in the whole world. It whips out an easy $5 billion worth of precious yellow metal every year.
There’s a positive correlation between the gold and AUD/USD currency pair. That means that when the gold increases in value, so does the AUD/USD. And when the gold stands down, so does the AUD/USD.
Bond Yields and Currency Movements
A bond refers to the debt that an entity issues when it needs somebody to lend it some money for some purposes. Governments, municipalities, and international companies can all issue bonds. Bear in mind that these entities need huge amounts of money to operate, which means the often need to borrow some funds from banks and individuals.
Bonds differ from stocks in a way that bonds have their maturity term. If you have a bond from a company, you receive a principal, which is the money you lent, with a specific rate of return or bond yield, which refers to the interest paid to you as a bondholder.
Bond yields can serve as a great indicator of the stock market’s strength. This then reflects the demand for the US dollar.
How does that happen?
The demand for bonds usually rises when investors become too worried about their stock investments, pushing them to invest to switch to bonds. This drives bond prices higher. And since bond prices are inversely correlated with bond yields, bond yields go down.
As more and more investors move away from stocks and other risky investments, the increasing demand for US bonds and US dollar pushes the prices higher.
Government bond yields are used as indicators of the overall trajectory of a country’s interest rates and expectations. For instance, if you’re in the United States, you’re probably going to pay much attention to the 10-year Treasury note. A soaring yield would be dollar bullish, while a slumping yield would be dollar bearish.