Commodities play a key role in forming forex market valuations for particular currencies. Forex traders put heavy emphasis on commodity prices when valuing currencies of countries that are heavily dependent upon commodities exports to drive their economies. This is also true for countries with economies that are heavily dependent on importing commodities.
Currency and Commodities Correlations
One strategy forex traders use is to play off correlations between specific currency pairs and particular commodities markets. Some of the most highly commodities-correlated currencies are the Canadian dollar, Australian dollar, New Zealand dollar and the South African rand. Other currencies are known to be negatively correlated in their relation to commodities prices, such as the Japanese yen.
Canada’s economy heavily depends upon exporting oil. Therefore, fluctuations in the price of oil has a significant effect on the currency valuations of the Canadian dollar. The price of oil is usually positively correlated with the value of the Canadian dollar.
Oil Prices and the Japanese Yen
When it comes to oil trade Japan is practically the opposite of Canada. The Japanese economy imports almost all of its oil. Therefore, when the price of oil spikes upward it can be highly detrimental to the Japanese economy. Usually the Japanese yen is inversely correlated with the oil market.
Oil Prices as a Leading Indicator for CAD and JPY
Due to being on the opposite sides of the spectrum, from an exporter/importer perspective, trading the Japanese yen against the Canadian dollar is seen as a proxy to trading oil markets. Usually oil market fluctuations act as a leading indicator for moves in the CAD/JPY. This is also true many times for the USD/CAD.
Gold Market Effects on Australian dollar and South African rand
Gold market fluctuations, like with oil prices, correlate with currency valuations based upon how much a country’s economy depends on gold exports and imports. Australia and South Africa are major gold exporters, therefore gold price movements can many times act as leading indicators for the Australian dollar and the South African rand.
On the other hand, forex traders cannot solely rely on commodity correlations to make trading decisions. Many times there are periods where these correlations breakdown for various economic reasons. Therefore, it is important that forex traders pay close attention to how strong correlations are at the particular time of making a trade. Also, other fundamental and technical factors may be useful to consider when creating a trading plan.
Le Bach Pham has been writing professionally after receiving his Bachelor’s of Art in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors.