How Different Markets Correlate: Stocks, Forex, Commodities

Introduction

Financial markets are not isolated systems. The performance of one asset class often influences another, creating patterns known as market correlations. Recognizing these relationships allows investors and traders to better understand market dynamics, anticipate potential price movements, and manage portfolio risks effectively.

Among the most significant and widely followed markets are stocks, forex, and commodities. While each has its own drivers, they are connected through global economic activity, monetary policy, and investor sentiment. This article explains how these markets interact, why correlations change, and how investors can apply intermarket analysis in practice.

Understanding Market Correlation

Market correlation measures the degree to which two assets move in relation to each other.

• Positive correlation: Both assets tend to move in the same direction. For example, oil prices and the Canadian dollar often rise and fall together.
• Negative correlation: Assets typically move in opposite directions, such as the U.S. dollar and gold.
• Zero correlation: The movement of one asset has little to no statistical relationship with the other.

Correlation is expressed as a coefficient between +1 (perfect positive) and -1 (perfect negative). A coefficient near 0 suggests no significant relationship. Importantly, correlations are dynamic and can shift over time based on changes in economic cycles, interest rates, and geopolitical events.

Stocks and Commodities

The relationship between stocks and commodities is influenced by economic growth, inflation, and industry-specific factors.

1. Economic Growth Connection

During economic expansions, demand for raw materials such as oil, copper, and steel increases, pushing commodity prices higher.

Stock markets often rally in parallel as corporate earnings rise in a strong economy.

Resource-based companies—like energy producers and mining firms—benefit directly from higher commodity prices.

2. Inflationary Pressures

When commodity prices rise sharply, they can increase production costs for companies, which may reduce profit margins and weigh on stock valuations.

Central banks may respond with interest rate hikes to control inflation, which can further impact stock prices.

3. Safe-Haven Commodities

Precious metals, especially gold, often gain value when stock markets decline.

This inverse relationship occurs because investors seek assets perceived as stores of value during economic uncertainty.

Example:
During the 2020 pandemic market turmoil, gold prices surged as stock markets initially collapsed, reflecting the safe-haven demand.

Forex and Commodities

The foreign exchange market often reflects commodity price movements, particularly for currencies tied to resource exports.

Key Commodity Currencies:

• Canadian Dollar (CAD) – Linked to crude oil prices due to Canada’s status as a major exporter.
• Australian Dollar (AUD) – Correlates with industrial metals like iron ore and copper, key Australian exports.
• New Zealand Dollar (NZD) – Influenced by agricultural commodity trends, especially dairy products.

How the Link Works:

• Rising commodity prices boost export revenues, often strengthening the related currency.
• Falling commodity prices can weaken those currencies, as export income declines.

Example:
In early 2022, oil prices climbed sharply due to supply concerns, and the Canadian dollar appreciated against the U.S. dollar, reflecting higher export earnings.

Stocks and Forex

Stock market performance can significantly affect currency exchange rates, and vice versa.

1. Capital Flows

• A strong stock market can attract foreign investment, increasing demand for the local currency.
• A declining market may prompt capital outflows, weakening the currency.

2. Risk Sentiment

• In risk-on environments, investors move capital into higher-yielding currencies, often tied to strong equity markets.
• In risk-off periods, safe-haven currencies such as the Japanese yen (JPY) and Swiss franc (CHF) typically strengthen.

3. Interest Rate Expectations

• Positive equity performance may lead markets to expect higher interest rates, strengthening the currency.
• Weak markets could signal slower growth, reducing rate hike expectations and weakening the currency.

Example:
When U.S. equity indices reached record highs in late 2021, the U.S. dollar also gained strength as foreign investors poured money into U.S. markets.

Intermarket Analysis in Practice

Intermarket analysis studies relationships between asset classes to forecast market trends and manage investment strategies.

Practical Applications:

1. Trend Confirmation – If both stocks and commodity prices rise, it may confirm strong economic growth.
2. Divergence Signals – If stocks rise but commodities fall, it could indicate a potential slowdown ahead.
3. Risk Management – Understanding correlations helps diversify portfolios and reduce risk concentration.

Example in Action:
A trader might monitor oil prices to anticipate movements in the CAD/USD currency pair or watch gold prices for clues about stock market sentiment.

Why Correlations Change Over Time

Correlations are not static. They evolve due to:

• Monetary policy shifts – Interest rate changes can alter capital flows between markets.
• Global trade developments – Supply chain disruptions or new trade agreements can change commodity demand and currency valuations.
• Geopolitical events – Wars, sanctions, and political instability can temporarily or permanently change relationships.
• Economic cycles – Recessions and booms affect asset demand differently across markets.

Historical Case Study:
During the 2008 financial crisis, correlations between most global assets spiked to unusually high levels as investors sold off risk assets indiscriminately in search of liquidity.

Building a Strategy Around Correlation Knowledge

Investors can use correlation insights in several ways:

• Portfolio Diversification: Combining assets with low or negative correlations can reduce volatility.
• Hedging Strategies: Using negatively correlated assets to offset potential losses in other holdings.
• Market Timing: Anticipating market shifts by observing changes in related asset classes.

Example:
A trader holding equities may hedge risk by taking a position in gold during periods of heightened uncertainty.

Conclusion

Stocks, forex, and commodities are interconnected through complex economic and market forces. While understanding these relationships can offer valuable insights for trading and investing, correlations are not permanent and must be monitored continuously.

A disciplined approach to intermarket analysis—paired with sound risk management—can help investors navigate shifting market environments more effectively.

Curious about economic indicators that influence all three markets? Learn more here.