Commodities, namely gold and oil, have a strong correlation with currency markets. By understanding the relationship between gold, oil and currency pairs, forex traders can gauge risk, forecast price changes as well as understand exposure.
Gold and oil prices generally tend to move based on almost similar fundamental forces that affect some currency pairs. Four major currencies, the Canadian Dollar, the Swiss Franc the New Zealand Dollar and the Australian Dollar, 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 is not that strong. Each one of these currencies has a correlation with gold and oil and the fundamental reasons of doing so.
Knowledge of the fundamental reasons behind these correlated movements between gold, oil and these currencies and 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 too.
During unstable geopolitical times as well as when global recessionary fears become strong like that presently, investors tend to run away from US Dollar and instead turn to gold as a safe haven for their investments and hoard their wealth.
Therefore, as Dollar loses value, gold prices tend to rise as wary investors become afraid of losing their wealth. As US is going to print more and more dollars to finance its budget deficits, USD will depreciate and gold will appreciate. Many countries are trying to hoard gold keeping in view this anticipated depreciation of dollar. AUD/USD, NZD/USD and USD/CHF are currency pairs that 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 a leading indicator of currency prices. As such, commodity block traders monitor gold and oil prices to forecast movements in currency pairs. This knowledge can help forex traders to diversity their risk exposure using different products. The combination of gold and forex trading can be very profitable.
Gold and oil prices generally tend to move based on almost similar fundamental forces that affect some currency pairs. Four major currencies, the Canadian Dollar, the Swiss Franc the New Zealand Dollar and the Australian Dollar, 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 is not that strong. Each one of these currencies has a correlation with gold and oil and the fundamental reasons of doing so.
Knowledge of the fundamental reasons behind these correlated movements between gold, oil and these currencies and 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 too.
During unstable geopolitical times as well as when global recessionary fears become strong like that presently, investors tend to run away from US Dollar and instead turn to gold as a safe haven for their investments and hoard their wealth.
Therefore, as Dollar loses value, gold prices tend to rise as wary investors become afraid of losing their wealth. As US is going to print more and more dollars to finance its budget deficits, USD will depreciate and gold will appreciate. Many countries are trying to hoard gold keeping in view this anticipated depreciation of dollar. AUD/USD, NZD/USD and USD/CHF are currency pairs that 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 a leading indicator of currency prices. As such, commodity block traders monitor gold and oil prices to forecast movements in currency pairs. This knowledge can help forex traders to diversity their risk exposure using different products. The combination of gold and forex trading can be very profitable.
About the Author:
Mr. Ahmad Hassam is a Harvard University Graduate. He is interested in day trading and swing trading stocks and currencies. Know These Forex Broker Tricks. Learn Currency Trading!
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