In the world of trading, understanding intermarket correlations can be an essential skill for making informed decisions. These correlations are broadly categorised depending on the asset type definition, offering unique trading opportunities. In this article, we will help you grasp the significance of that concept for more effective decision-making and risk management.

Types of Intermarket Correlations

There are three major types of market correlations.

Positive Correlations

Positive correlations occur when two or more asset classes move in the same direction. This means that as one asset's price rises, the other asset's price also tends to rise, and vice versa. For example, the oil market and stocks of oil exporting companies tend to rise together. Also, a weaker domestic currency can boost exports, resulting in the country's currency and the stocks of local export companies moving up together.

Negative Correlations

Negative, or inverse correlations, occur when two or more asset classes move in opposite directions. In this case, when one asset's price increases, the other asset's price tends to decrease, and vice versa. Stocks and treasury bonds have an inverse correlation. Crude oil prices are also often negatively correlated with the value of the US dollar, while gold has a negative correlation to equity markets.

No Correlation

No correlation indicates no discernible relationship between two or more asset classes. In other words, changes in the price or performance of one asset have no consistent effect on the other. Gold prices and real estate prices often exhibit no significant correlation, while the price of Bitcoin is typically not correlated with the prices of agricultural commodities like wheat or soybeans.

Key Intermarket Relationships in Different Asset Types

Let’s explore the intermarket relationships within various asset classes and shed light on some basic aspects.

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