Predicting the next move in the markets is the key to making money in trading, but putting this simple concept into action is much harder than it sounds.
Professional forex traders have long known that trading currencies requires looking beyond the world of FX. The fact is that currencies are moved by many factors - supply and demand , politics, interest rates, economic growth , and so on.
The top three currencies that have the tightest correlations with commodities are the Australian dollar, the Canadian dollar and the New Zealand dollar. Other currencies that are also impacted by commodity prices but have a weaker correlation are the Swiss franc and the Japanese yen. Knowing which currency is correlated with what commodity can help traders understand and predict certain market movements.
Here we look at currencies correlated with oil and gold and show you how you can use this information in your trading. Top 10 Forex Trading Rules.
Oil and the Canadian Dollar Over the past few years, the price of commodities has fluctuated significantly. With many countries around the world in recession , the trend of commodity prices can mean the difference between a deeper downturn and a faster recovery. Knowing which currencies are affected by what commodities will help you make more educated trading decisions.
Find out how the everyday items you use can affect your investments in Commodities That Move The Markets. A decline in oil prices is a nightmare for oil producers , while oil consumers enjoy the benefits of greater purchasing power. This is a complete degree change from the situation at the beginning of , when record-high oil prices put a big smile on the faces of oil producers while forcing oil consumers to pinch pennies.
There are a number of reasons to explain the fall in oil prices, including a stronger dollar oil is priced in dollars and weaker global demand. As a net oil exporter , Canada is severely hurt by declines in oil, while Japan - a major net oil importer - tends to benefit. On a day-to-day basis, the correlation can break, but over the long term it has been strong because the value of the Canadian dollar has good reason to be sensitive to the price of oil.
Canada is the seventh-largest producer of crude oil in the world and continues to climb up the list, with production in oil sands increasing regularly. The geographical proximity between the U. But Canada does not service only U. Read more in Peak Oil: Figure 1 shows the clearly positive relationship between oil and the Canadian loonie.
Oil and the Japanese Economy At the other end of the spectrum is Japan, which imports nearly all of its oil compared to the U. Japan also lacks the flexibility to switch to nuclear power because it is a huge net importer of uranium for its nuclear power plants.
Therefore, when oil prices skyrocket, the Japanese economy suffers. An Attractive Oil Play: Going for Gold Gold traders may also be surprised to hear that trading the Australian dollar is just like trading gold in many ways.
Generally speaking, this means that when gold prices rise, the Australian dollar appreciates as well. A weaker, but still important, correlation is that of gold prices and the Swiss franc. However, the relationship broke down somewhat in September as the U. Trading Currencies as a Supplement to Trading Oil or Gold For seasoned commodity traders, it may also be worthwhile to look at trading currencies as an alternative or a supplement to trading commodities.
In addition to being able to capitalize on a similar outlook e. When trading currencies, you are dealing with countries, and countries have interest rates, of course. These are unleveraged rates, which mean that with 10 times leverage , for example, net of any exchange rate changes, the interest income would be that much higher. Leverage also makes the trade riskier, which means that if the trade turns against you, losses will be larger.
Conclusion If you want to trade commodity currencies, the best way to use commodity prices in your trading is to always keep one eye on movements in the oil or gold market and the other eye on the currency market to watch how quickly it responds.
Due to the slightly delayed impact of these movements on the currency market, there is generally an opportunity to overlay a broader movement that is happening in the commodity market to that of the currency market. It never hurts to be more informed about commodity prices and how they drive currency movements. Wading Into The Currency Market. Dictionary Term Of The Day. Broker Reviews Find the best broker for your trading or investing needs See Reviews. Sophisticated content for financial advisors around investment strategies, industry trends, and advisor education.
A celebration of the most influential advisors and their contributions to critical conversations on finance. Become a day trader. FXCM Going for Gold Gold traders may also be surprised to hear that trading the Australian dollar is just like trading gold in many ways. How much a fixed asset is worth at the end of its lease, or at the end of its useful life. If you lease a car for three years, A target hash is a number that a hashed block header must be less than or equal to in order for a new block to be awarded.
Payout ratio is the proportion of earnings paid out as dividends to shareholders, typically expressed as a percentage. The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as No thanks, I prefer not making money.
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