The correlation of commodity prices and currency movement has been one of the common rules in FOREX trading. Professional FOREX traders who I had been acquainted with will blindly subscribe to this statement. This rule apparently helps them to understand and predict market movements of certain major currencies. Top four currencies that have a strong correlation with commodities are the Australian dollar, the Canadian dollar, the New Zealand and the Norwegian Krone. Other currencies like Japanese Yen and Swiss Franc are also affected by the movement of commodity prices. However, their correlations are not as strong as the top four. The correlations are related to currencies with oil and gold.
It has something to do with being an exporter or importer of these commodities. As Canada and Norway are in the top 10 list of oil exporter countries, any vulnerability on oil prices would directly impinge on the value of their currencies. In the long run, the correlation has been strong especially when the oil priced in US dollar. Thus, any appreciation of oil price (remember in USD) would depreciate the value of USD/CAD or USD/NOK.
Concurrently, for Norway, you need to appreciate the importance of Norwegian exports figure. Its economy dependents on the oil exports. Over the years, crude oil is accounted for more than 50% of the total exports. This high correlation to the oil price allows FOREX traders to use oil price as one of the indicators in their trading strategy. For some traders, they use NOK as a hedge especially against USD.
Quite the opposite, Japan is the oil importer country. If the oil prices surged, the Japanese economy would suffer so does its currency. In short, the currency pair CAD/JPY would has a strong correlation with oil prices i.e. the value of CAD/JPY would follow the direction of oil prices. Similarly, the appreciation of oil price would depreciate USD/JPY.
The performance of AUD and NZD are highly related to gold. Meaning, the appreciation of gold prices should lead to the appreciation of AUD, followed closely by NZD. The similar impact on the latter is basically due to the close economic link between Australia and New Zealand. For FOREX traders, who like AUD and NZD, you should also consider trading gold.
Conclusion
Have you ever wondered why CNBC or Bloomberg always put on view the Dollar Index (DXY as quoted in Bloomberg)? If you knew what DXY consists of, you would appreciate that it actually summaries the performance of USD against Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. So hence, you can practically use DXY as guidance without referring to every major currency.
In fact, if you want to save time and happen to have access to Bloomberg terminal, go to the Foreign Exchange Forecasts (FXFC) function.You could browse analysts’ predictions for the dollar and other currency pairs. But don’t swallow everything. Check the movement in gold and oil prices. Consider using technical indicators as well. Long oil, short USD/CAD. Long gold, long AUD or NZD.
Off you go. Place your bet now!
