Commodities, namely gold and oil, have a substantial connection with the forex markets. Understanding the relationship between gold, oil and currencies can help forex traders gauge risk, forecast price changes as well as understand exposure.
Gold and oil prices essentially tend to move based on almost similar fundamental forces that affect a few currency pairs. Four major currencies, the New Zealand Dollar, the Australian Dollar, the Canadian Dollar and the Swiss Franc are considered to be commodity currencies.
The NZD, CAD, AUD, and CHF all have strong connection with gold prices. Natural gold reserves and currency laws in these countries result in almost mirror like movements. The CAD also tends to move with the oil prices.
However, the correlation between CAD and oil prices is not that strong. Each one of these currencies has a correlation with gold and oil and the fundamental factors behind doing so.
Knowledge of the fundamental factors behind these movements, their direction and strength could be a good method to discover trends in both the markets. There is a strong correlation between gold prices and US Dollar as well.
During unstable geopolitical times as well as when fears of global recession become strong like that presently, investors tend to shy away from Dollar and instead turn to gold as a safe haven for their investments.
Therefore, as Dollar depreciates, gold prices tend to appreciate as wary investors become afraid of losing their wealth. AUD/USD, NZD/USD and USD/CHF currency pairs tend to mirror gold movements.
Global energy needs are wholly dependent on oil supplies. Oil prices usually tend to have a huge impact on the global economy. Dont forget, the early part of 2008 when oil and commodity prices jumped skyward taking the global economy to the brink of recession. Oil prices did come down due to the stock market crash but it is being forecasted that it will rise again when the global economy comes out of recession and the demand for oil rises again. USD/CAD currency pair tends to show an oil relationship. The major reason for this relationship is the heavy dependence of US and Canadian economies on foreign oil.
Generally speaking, commodity prices are considered to be a leading indicator of currency prices. The relationship can be positive or negative. As such, commodity block traders monitor gold and oil prices to forecast movements in currency pairs. The knowledge of this relationship between commodities and currencies can help forex traders to diversity risk exposure using different products. The combination of gold and forex trading can be very profitable.
Gold and oil prices essentially tend to move based on almost similar fundamental forces that affect a few currency pairs. Four major currencies, the New Zealand Dollar, the Australian Dollar, the Canadian Dollar and the Swiss Franc are considered to be commodity currencies.
The NZD, CAD, AUD, and CHF all have strong connection with gold prices. Natural gold reserves and currency laws in these countries result in almost mirror like movements. The CAD also tends to move with the oil prices.
However, the correlation between CAD and oil prices is not that strong. Each one of these currencies has a correlation with gold and oil and the fundamental factors behind doing so.
Knowledge of the fundamental factors behind these movements, their direction and strength could be a good method to discover trends in both the markets. There is a strong correlation between gold prices and US Dollar as well.
During unstable geopolitical times as well as when fears of global recession become strong like that presently, investors tend to shy away from Dollar and instead turn to gold as a safe haven for their investments.
Therefore, as Dollar depreciates, gold prices tend to appreciate as wary investors become afraid of losing their wealth. AUD/USD, NZD/USD and USD/CHF currency pairs tend to mirror gold movements.
Global energy needs are wholly dependent on oil supplies. Oil prices usually tend to have a huge impact on the global economy. Dont forget, the early part of 2008 when oil and commodity prices jumped skyward taking the global economy to the brink of recession. Oil prices did come down due to the stock market crash but it is being forecasted that it will rise again when the global economy comes out of recession and the demand for oil rises again. USD/CAD currency pair tends to show an oil relationship. The major reason for this relationship is the heavy dependence of US and Canadian economies on foreign oil.
Generally speaking, commodity prices are considered to be a leading indicator of currency prices. The relationship can be positive or negative. As such, commodity block traders monitor gold and oil prices to forecast movements in currency pairs. The knowledge of this relationship between commodities and currencies can help forex traders to diversity risk exposure using different products. The combination of gold and forex trading can be very profitable.
About the Author:
Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading and swing trading stocks and currencies. Know These Forex Broker Tricks. Learn Currency Trading!
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