Forex and other financial markets

There are a number of financial markets in the world, and though forex is the most traded, it does not mean it is completely independent from the other markets. However, there is a lot of misinformation about how the various financial markets correlate. Understanding how the financial markets influence each other, and the relationships between them, will help you to properly evaluate the potential changes in the forex market.

The first thing you want to remember is that each market functions according to its own rules, and dynamics, and thus operates independently of one another according to things like positioning, sentiment, and news.

The second aspect of the financial markets you must internalize is that they may overlap in some areas but should ALWAYS be viewed within their own right, and investors need to trade each market individually. If you don't, you will be sorely disappointed.

The following is an overview of the big financial markets and how they related to currencies:

Gold-
In short, you can create a relationship for currencies and gold in the long term sense, and it is typically an inverse relationship. If one is doing well, the other will tend to be weaker. However, in the short term, they function so much within their own dynamics and liquidity, that trying to pinpoint an exact correlation is tenuous, if not impossible. Gold is so much smaller that the currency market, that it is best to look at it in regards to currencies only if major moves are happening. Gold investors, on the other hand will likely want to watch currencies, but currency investors really only need to know when gold prices move significantly, as this is the only time it will impact the dollar enough to warrant attention.

Oil-
Oil is an inflation input for currencies. It can impact the inflation, but not significantly, it is simply one of several factors. In the short term, there is no significant relationship between what is happening in the oil market and currencies.

Stocks-
The relationship between stocks and currencies is interesting. They may overlap, but typically only when the equity market is volatile, and even then not in a significant enough way. Baically, stocks operate on a microeconomic scale, responding to individual corporate results, etc. while currencies operate on a macroeconomic scale, responding to wider-ranging economic and political developments.

Bonds-
When it comes to financial markets being related to currencies, bonds are the closest as both bonds and currencies are heavily influenced by interest rate expectations. However, this is a long term correlation, due to short-term supply and demand, it is difficult to establish a short-term link between the two markets. As a trader, if you want to keep an eye on bonds to see what is happening in currencies, it is best to simply keep an eye on the benchmark government bond of the major currencies.