Currencies and Other Financial Markets

Let’s look at some of the other key financial markets and see what conclusions we can draw for currency trading.

Gold
Gold is commonly viewed as a hedge against inflation, an
alternative to the U.S. dollar, and as a store of value in times of
economic or political uncertainty.

Overall, the gold market is much smaller than the forex market, so if we were gold traders, we’d sooner keep an eye on what’s happening to the dollar, rather than the other way around. With that noted, extreme movements in gold prices tend to attract currency traders’ attention and usually influence the dollar in a mostly inverse fashion.

Oil
The idea is that, because some countries are oil producers, their currencies are positively (or negatively) affected by increases (or decreases) in the price of oil. If the country is an importer of oil (and which countries aren’t today?), the theory goes, its currency will be hurt (or helped) by higher (or lower) oil prices. Correlation studies show no appreciable relationships to that
effect. Hence, we are the above sentence is invalid.

The best way to look at oil is as an inflation input and as a limiting
factor on overall economic growth. The higher the price of oil, the higher inflation is likely to be and the slower an economy is likely to grow. The lower the price of oil, the lower
inflationary pressures are likely (but not necessarily) to be.

Bonds
Fixed-income or bond markets have a more intuitive connection to the forex market because they’re both heavily influenced by interest rate expectations. However, short-term
market dynamics of supply and demand interrupt most attempts to establish a viable link between the two markets on a short-term basis.

Overall, as currency traders, 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 relative interest rates (interest rate differentials) exert a major influence on forex market.