Key Financial Markets
The Forex market can be considered the most influencial in terms of it's size and impact, but there are several other key financial markets that influence the world's economy. Predominantely, the other central markets are made up of gold, oil, stocks and bonds. These may or may not interconnect with the forex market but in order to establish zero correlation, both must be observed over a sufficiently long amount of time.
When looking at a market, it is always important to keep in mind that even if relationships do exist amongst them, they are still autonomous and must be observed independently regardless of any bias that may emerge from correspondence to other markets. The way in which the market fluctuates and changes depends on data, news, positioning and sentiment. Changes in a given market may influence changes in another, but it is important to remember that each one functions internally, and it is important to consider them as seperate.
Gold
Gold can be considered a key financial market in terms of international investement security, when inflation increases the risk of loss in forex trade. It is widely regarded as an alternative to the U.S dollar – the most traded currency in the world. Regardless of this relationship between the two, further correlations are minimal, mainly due to the polar relationship between the two – a high US dollar usually means a low price of gold, and the revese, a high price of gold usually denotes a low US dollar. Because the forex market is significantly larger than the gold market, usually the latter tends to be more effected by currency trading, and therefore the influence of forex on gold is much more significant for the market than the impact of fluctuations of gold on forex.
Oil
Although there is a common assumption that there is a strong relationship between the oil market and currency trading, this is quite misleading, and the US dollar, which is considered to be most effected by oil, is in fact least likely to have a long-term influence from it. No short-term correlations have been observed either, mainly due to forex trading primarily occuring in the short-term itself. The key misaprehension about the relationship emerges from the idea that the currencies of countries that produce oil are positively or negatively influenced by increases and decreases in the price of oil. Following this is the concept that when countries import oil, their currency will either strengthen due to lower oil prices, of weaken due to higher oil prices – neither of which have been proven. Oil on the other hand can be a factor associated with inflation, therefore affecting overall economic stagnation. Typically the correlation between oil and the economy is that increasing oil prices also increase inflation, from which we can derive potential changes in the forex market, although oil isn't the only key financial market which influences inflation.
Stocks
Stocks are another form of a key financial market, based on shares in microeconomic activity, that increase or decrease in value depending on corporate performance, prospects and the state of the industry on which it relies for profit. It is essentially a result of the physical trade that occurs in business transactions between the corporation, and the customer. In the long term, near zero correlation has been established between stocks and the forex market. This is largerly due to forex trading being a macroeconomic market, that shifts due to economic and political influence as opposed to business performance. Because the two markets are for the most part reliant on different forms of financial activity, there is no relationship between them in periods of consistent economic activity. The only form of potential correlation exists at market extremes. If the value of a given stock dramatically increased, it is possible that the given currency would experience more coercion and be under pressure. This remains highly hypothetical, as it is not neccessarily true, and there is no automatic relationship between extreme increases or decreases in the value of stocks, and the strength of any given currency.
Bonds
One key financial market that does have a strong correlation with forex trading, are bonds. Bonds are essentially given amounts of money that a client invests. The corportation in return promises to pay a specifed rate of interst during the duration of the bond, and repay the face value of it when it matures. The way in which a corporation invests the bonds is based on the intrest rates market, which also has a strong influence on the forex market. Short-term correlations between forex and bonds are difficult to establish due to the constant changes in the two, but over the long term clear interconnections can be established between the two due both of them being heavily depedant on the interest rate market.
Currency traders will often follow trends in the bonds market which may allow them to dervive expectations in the forex market in reflection to those changes. Changes in relative interest rates have a substatantial influence on the forex market, and it is important to keep track of any changes occuring in the bond market of a given major-currency country.
Forex and financial markets
As we can clearly see, although the forex market is undoubtadely the largest key financial market in the world, it is important to remember that certain correlations do exist between other forms of worldwide trade.
Bonds tend to equally influence the forex market as much as the forex market influences the bonds market, but on the other hand, as we can see from trading gold, the relationship can also be one-sided. In some cases, such as oil, relationships are exaggerated and there are false assumptions about how much the markets really influence each other.
The key factors that can be observed as the most influencial in terms of why there may be a lack of correlation between forex and any other given market, is the way in which the commodity is traded. Forex is a rapidly altering, liquid market, and the changes in trade may be too weak, or too short-lived to cause any major influence on markets that demonstrate gradual shifts over longer periods of time.