Correlations between Forex and Commodities

Between;  We will discuss the following topics:

⦁ The 4 currencies most strongly related to commodities
⦁ Commodity Pairs – Commodity currency pairs
⦁ Gold and its relationship with the Forex market
⦁ Crude Oil and its Relationship to the Forex Marke

Commodities, like Forex currencies, are strongly influenced by market fundamentals. In particular, gold and oil have an important relationship with the Forex market, and can be used as indicators when trading in the forex market.

What are Commodities?
Basically, when we talk about raw materials, we are referring to oil, gold or copper among others.

Correlations

As mentioned above, commodity prices are affected by market fundamentals.
Especially gold and oil have a very important relationship with the Forex market, which can be used favorably when trading.
There are 4 currencies that are more linked to the price of commodities:

⦁ The Australian Dollar (AUD) or Aussie.
⦁ The Canadian Dollar (CAD) or Loonie.
⦁ The New Zealand Dollar (NZD) or Kiwi.
⦁ The Swiss Franc (CHF) or Swissie.

The Australian dollar is correlated with the price of gold, as Australia is the 3rd largest gold producer and one of the strongest economies on the planet.
The Canadian dollar is correlated with the price of oil, as this country is one of the largest producers of this raw material.
The New Zealand dollar is correlated with the price of gold.
The Swiss franc is also strongly related to the price of gold, due to its enormous reserve of this metal in relation to its currency.

Commodity Currency Pairs

There are 3 currency pairs known as “commodity pairs” due to their strong correlation with the movement of gold and oil prices mainly.
These pairs are:
USD/CAD : Correlated to the price of oil.
USD/AUD : Correlated to the price of gold.
USD/NZD: Correlated to the price of gold.

Gold and its relationship with the Forex market

Although the United States is the second largest producer of gold, below South Africa, gold does not normally move in line with the US dollar. Rather they tend to maintain an inverse correlation. This is because in times of geopolitical uncertainty investors tend to move away from the US dollar (USD) towards gold as a security measure, like a “safe haven”.
In Forex, no currency is considered more secure and stable than the Swiss franc. Its political neutrality and the fact that 40% of its monetary reserves are backed by gold give it an aura of security during periods of uncertainty.
For these reasons the CHF/USD pair has a strong positive correlation with the price of gold. Both Canada and Australia have large precious metal reserves and both countries have highly developed mining sectors. Australia is the 3rd largest gold exporter, with mining contributing approximately 8.5% of its GDP.

Canada is the 3rd largest gold producer. AUD/USD, NZD/USD, USD/CHF currency pairs tend to move in line with gold closely, given that the other currency has natural and political links with gold. AUD/USD has a strong positive correlation with gold due to the fact that Australia is the third largest exporter of this commodity.

Relationship between Crude Oil and the Forex Market

The correlation between oil and currencies is more complex than that which exists with gold.
The Canadian dollar is the currency most influenced by changes in the price of oil. Canada’s total oil reserves were 178.9 trillion barrels a few years ago, just below Saudi Arabia.
If oil prices rise, the CAD is expected to follow closely.

Relationship between the U.S. Securities Market and the USD

A strong stock market normally suggests that the dollar should strengthen as well. This is because investors use this currency to participate in profits. This happened in the bull market of the 1990s.

More recently, however, the dollar and the US stock market have not moved in line. This is due to the fact that more and more American companies are earning their income outside the United States.

Using Currency Correlations to Trade Forex

Often, currency pairs are closely related to each other, and this is something that can be used advantageously when trading Forex. Correlation Analysis helps to understand these relationships. Positive and negative correlations between pairs are measured decimally and serve to reflect the extent to which they operate online or divergently from each other.

The closer the number is to 1, the stronger the positive correlation. Conversely, the closer to -1, the stronger the negative correlation. A correlation of 0 would indicate a completely random relationship. The correlation between currencies is measured between specific time periods, and it is important to note that these relationships may change over time.

Correlations can help Forex traders manage their risk exposure by using a pair with a negative correlation such as a hedge. A positive correlation between two currency pairs can be used as a leading indicator.

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