Forex commodity price is said to be the amount or value of money that is used to pay for a commodity or that a commodity cost. It is possible for some currencies to be heavily correlated with commodity prices. They are three currencies that have the highest correlations with commodity prices. They are the Australian dollar, the Canadian dollar and the New Zealand dollar. Other currencies with weaker correlation that are also influenced by commodity are the Swiss franc and Japanese yen. Knowing which currency is correlated with what commodity actually helps traders understand and predict various market movements.
OIL AND THE CANADIAN DOLLAR
Over the past years, the price of various commodities has significantly fluctuated. For example, Oil increased from 60 USD a barrel in 2006 to 147 USD a barrel in 2008 and decreased back to 40 USD a barrel in the first quarter of 2009 and increasing again to 80 USD in 2011. With many countries undergoing recession in the world today, the trend of commodity prices actually mean the difference between a deeper downturn and a faster regain.
Oil is one of the world's primary necessities and most people in developed countries cannot live without it. In February 2008, the price of oil was close to 70% below its all-time high of 147 USD set on July 11, 2007. A decrease in oil price is a nightmare for most oil producers while the consumers of oil enjoy the advantage of greater purchasing power. Stronger dollar and weaker global demand is the primary reason for the fall and rice of oil prices. As an oil exporter, Canada is severely affected by declines in oil, while Japan which is a major oil importer tends to benefit.
GOLD AND THE AUSTRALIAN DOLLAR
Trading the Australian dollar is same as trading gold in many ways. Australian dollar which is the world's third-largest producer of gold has an 84% positive correlation with gold between 1999 and 2008. Generally, this means that when the price of gold rises, the Australian dollar rises as well. The closeness of New Zealand to Australia makes Australia a preferred destination for exporting New Zealand goods. This means that the status of New Zealand's economy is closely related to the status of the Australian economy and explains why NZD/USD and AUD/USD have had close to 97% positive correlation over the same time period.
In conclusion, In trading commodity currencies, the best way to trade is by using commodity prices and being observant of the various movements in oil or gold and the currency market to watch how quickly they responds.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.