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Learn Forex: Understanding Currency and Commodity Correlations

Correlation between currency pairs and top traded commodities is prevalent in forex trading. Some currencies, also known as commodity currencies, are correlated to commodity prices that have a more significant influence on national economies. Price correlations can be either positive or negative and significantly affect the overall price movements. 

But first, what is Forex Trading? 

Foreign exchange is the process of exchanging one currency with another. This is a common financial process that can be performed for commercial or trading purposes. Forex trading is the speculation of currency prices for potential profits. Since forex trading is primarily exchanging one currency for another, currencies in the forex market are traded in pairs. The currency pair is a quotation for one currency against the other; known as quote currency and base currency. 

Currency pairs are affected by different fundamental and technical factors that affect the exchange rate. These factors include economic policies, political stability, trade flows, and of course the changes in supply and demand. The names of pairs use the abbreviation of currency and country names. For example, the USD/JPY currency pair refers to the US Dollar against the Japanese Yen. 

The eight most traded currencies in the forex market are the US dollar (USD), the euro (EUR), the British pound (GBP), the Japanese yen (JPY), the Canadian dollar (CAD), the Australian dollar (AUD), the Swiss franc (CHF), and the Chinese Yuan (CNY), according to the BIS survey in 2019. 

What is a Commodity Currency? 

A commodity currency is a currency whose value is correlated to the global price of certain commodities. In forex trading, commodity pairs are the currency pairs that involve currencies from countries that heavily depend on commodity exports and reserves. 

The top commodity currencies in forex trading are the Canadian Dollar, Australian Dollar, and New Zealand Dollar. So, if you want to trade any commodity currency pair you should first have a look at the correlated commodity.

Gold and Forex Correlation 

Gold and Forex Correlation 

Changes in gold prices affect the so-called commodity currencies. The commodity currency is a currency that is highly correlated to the changes in the prices of some commodities. 

Trading gold means you will have to monitor the movements of the US Dollar. For example, if the value of the US Dollar is increasing, that drives the price of the yellow metal lower. 

An additional factor to consider when you step into the world of gold trading is market liquidity. It is being traded nearly 24 hours per day around the world. This implies higher liquidity around the clock although, as with the forex market, it can be relatively quiet after the US session closes, and lower volumes may lead to volatile price movements.

Read also Gold vs Forex Trading: Which Should you Trade?

Currency And Commodity Correlations

The most well-known currency correlations are the key to understanding the forex market and how to conduct a proper fundamental analysis. As the forex trader gains the knowledge and insights into currency correlations, the ability to review the new releases and market updates improve. Thus, let’s review the top correlations of forex and commodities you will need to know.

USD and Gold Prices 

The US Dollar and Gold prices are negatively correlated and don’t get along very well. When the USD rises, gold prices fall. From a fundamental perspective, this relation can be justified by different stages of economic cycles and the risk appetite. Investors abandon the dollar and buy gold as a safe haven in times of economic uncertainty. 

Despite being a commodity that is mainly controlled by forces of supply and demand, gold is affected by other fundamental factors including interest rate decisions, central banks’ reserves, and volatility. The pricing of international gold prices in the US dollar also contributes to the negative correlation between both. 

Correlations,Currency and Commodity Correlations,Forex Forex Education

CAD and Oil Prices 

The Canadian dollar is positively correlated to oil prices as Canada is the main oil exporter. The economy relies heavily on oil exports, making it more vulnerable to changes in supply and demand, prices, and exporting levels. 

If you are a forex trader, you’d probably notice the strong relation between CAD and WTI prices. West Texas Intermediate or WTI is widely traded in North America, which makes it significantly influential to the Canadian economy. Canada’s oil exports are mainly directed to its larger neighbors to the south.  The value of the CAD is strictly tied to the price of the black gold. 

The following chart shows the price correlation between the WTI prices and the USD/CAD. Since the CAD is the quote currency in this pair, the pair goes down when oil prices rise and vice versa. 

CAD and Oil Prices  - Commodity correlations - AximDaily

AUD and Gold Prices 

Since mining plays a significant role in the Australian economy, participating with more than 5% of the overall national GDP, the AUD is highly influenced by the prices of metals like silver and gold. However, silver prices can be more reliable and enjoy a bigger impact on the value of the Aussie as well as the iron ore prices. 

Australia is among the world’s largest producers of iron ore, gold, zinc, diamonds and uranium. No wonder why the value of the Australian dollar heavily depends on the price of commodities, exporting activity, and demand changes. 

The value of the Aussie is positively correlated with iron ore and gold prices as well. When prices go up, the AUD appreciates and vice versa. Based on historical data, the AUD had an 80% correlation with gold prices, making gold a major influencer on the Aussie’s price movements. 

It’s worth noting that changes in demand from China, a top consumer and major trading partner to Australia, have a huge impact on the AUD outlook as well. 

The following chart explains the significant correlation between AUD and gold prices. 

Currency Correlations - AUD and Gold Prices - AximDaily

NZD and Dairy Prices 

New Zealand is the top dairy producer worldwide, the dairy industry is the biggest in the national economy and contributes to nearly 29% of the country’s overall exports. Changes in global dairy prices have a direct impact on the value of the New Zealand Dollar. 

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