Automated trading is an excellent tool for building strategies that are based on divergences/convergences between correlated markets. Intermarket analysis is a market-driven branch of technical analysis that studies the price relationships between different asset classes. This is a pure Macroeconomic analysis that studies the dynamics behind all major Intermarket correlations of the past 50 years.
Introduction to Intermarket Analysis
As world financial markets are getting closer to its other, new Intermarket correlations are emerging. Any modern financial market analysis should incorporate an Intermarket approach. However, Intermarket correlations are not static, and change over time, according to the macroeconomic environment. Inflation and interest rates are the key factors behind any relationship shifting. Intermarket relationships become particularly stronger during periods of a financial crisis.
The important role of interest rates
The level of interest rates is linked to inflation and plays a significant role in every financial market. Let’s see an example of how Intermarket relationships can create a macroeconomic cycle of events.
An example of how the Macroeconomic Cycle Works
The FED unexpectedly lowers interest rates and that has an immediate negative impact on the exchange rate of the US dollar. A weaker dollar provides a boost to commodity prices. Rising commodity prices are pushing inflation higher. Higher inflation forces FED to re-adjust interest rates higher. This is the middle-cycle phase. As interest rates are now rising, bond prices and stocks are falling. Investment projects are postponed. Consumption is getting lower and unemployment is getting higher. Higher interest rates also push the dollar exchange rate higher. The prices of commodities are declining as the dollar gets stronger. Inflation is diminishing and the central bank has now many good incentives to lower interest rates once again. The cycle is complete.