Correlations between asset classes are very strong right now. We can use correlations to develop short term cases for various markets.
Stock market and U.S. Dollar
Recent studies suggest that the U.S. stock market will face some short term weakness (click here and here), while the medium and long term are decisively bullish.
There is a strong inverse correlation between the S&P 500 and U.S. Dollar Index right now. This inverse correlation suggests that the U.S. Dollar will bounce a little more when the U.S. stock market pulls back.
The correlation between stock markets is even stronger. Here’s the S&P 500 vs DAX (German stock index).
This correlation suggests that the S&P 500 and DAX will pullback together.
The SSEC (Chinese stock index) and S&P 500 have a positive correlation too. This correlation suggests that the S&P 500 and SSEC will pullback together.
U.S. Dollar and Commodities
There is a strong negative correlation between gold and the U.S. Dollar Index. A U.S. Dollar Index bounce implies that gold will pullback even more.
Silver’s inverse correlation with the USD isn’t as strong as gold’s inverse correlation with the USD.
There is moderately inverse correlation between the U.S. Dollar and oil. A U.S. dollar bounce implies that oil will fall a little more.
There is moderately inverse correlation between the U.S. Dollar and copper. A U.S. dollar bounce implies that copper will fall a little more.
U.S. Dollar and Interest Rates
There isn’t a clear and consistent correlation between the U.S. Dollar and interest rates. Here’s the USD Index vs 10 year Treasury yield. The correlation swings back and forth between negative and positive.
Hence, we cannot use the U.S. Dollar’s direction to predict the direction of interest rates.
Rates (especially short term rates) are extremely overbought on a medium term time frame. Here’s the 2 year Treasury yield and weekly RSI (14). It has already made a bearish divergence on the weekly bar chart. We can expect a pullback in interest rates over the next few weeks.