Currency Trading - Commodity Prices Leading Indicators

May 26th, 2009 by Ahmad Hassam

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 AUD, NZD, CAD and CHF all have strong correlation with the gold prices. Natural gold reserves and currency laws in these countries result in almost mirror like movements. The CAD also tends to move somewhat 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 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 times of geopolitical instability as well as when fears of global recession become strong, traders tend to shy away from Dollar and instead turn to gold as a safe haven for their investments.

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.

Oil prices normally tend to have a huge impact on the global economy. Remember, the early part of 2008 when oil and commodity prices jumped skyward making the global economy jittery. Oil prices have come down 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 foreign oil in both US and Canada.

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 is a Harvard University Graduate. He is interested in day trading and swing trading stocks and currencies. Learn Forex Nitty Gritty. Read about Trend Forex System. Try Netpicks Forex Signal Service.

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Posted in Commodities Futures, Currency Markets, Currency Values, Current Currency, Fx Forex
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