Commodity Prices And Currency Movements (2024)

Professional forex traders have long known that trading currencies requires looking beyond the world of FX. Currencies are moved by many factors, includingsupply and demand, politics, interest rates, speculation, andeconomic growth. More specifically, since economic growth and exports are directly related to a country's domestic industry, it is natural for some currencies to be heavily correlated with commodity prices.

Three currencies that have the tightest correlations with commodities are the Australian dollar, the Canadian dollar, and the New Zealand dollar. Other currencies are also impacted by commodity prices but have a weaker correlation than the above three, such as the Swiss franc and the Japanese yen—which tend to rise when commodity prices fall.

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.

Oil and the Canadian Dollar

Oil is one of the world's basic necessities. At least for now, most people in developed countries cannot live without it. As a net oil exporter, Canada is severely hurt by declines in the price of oil, while Japan—a major net oil importer—tends to benefit from oil declines.

On a day-to-day basis, the correlation between oil and the Canadian dollar may 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 was the fourth-largest producer of crude oil in the world in 2022, and the size of Canada's oil reserves is fourth in the world.

The chart below shows thepositive relationship between oil (blue line) and the CAD/USD (inverted USD/CAD, as shown by "1/USDCAD"on the below chart; red/green line). The price of oil actually acts as a leading indicator for the price action of the CAD/USDin some cases.

Since the traded instrument in forex is the USD/CAD, when oil prices go up the USD/CAD falls, and when oil prices go down the USD/CAD rises.

An Attractive Oil Play: CAD/JPY

At the other end of the spectrum is Japan, which imports nearly all of its oil. Japan's lack of domestic sources of energy, and its need to import vast amounts of crude oil, natural gas, and other energy resources, make it particularly sensitive to changes in oil prices.

Looking at this from a net oil exporter/importer perspective, the currency pair that tops the list of currencies to trade to express a view on oil prices is the Canadian dollar against the Japanese yen. The chart belowillustrates the tight correlation between oil prices (blue line) and CAD/JPY (red/green line). Oil prices tend to be the leading indicator for CAD/JPY price action, often with a delay.

While the correlation is not perfect, major up moves in oil (blue) are typically followed by a rise in the CAD/JPY, and declines in oil are typically followed by declines in the CAD/JPY.

Going for Gold

Trading the Australian dollar (AUD) can also be thought of as a proxy for trading gold in many ways. As the world's third-largest producer of gold in 2022, the Australian dollar has a high positive correlation with the precious metal.

Generally speaking, this means that when gold prices rise (blue line), the Australian dollar (red/green line) appreciates as well.

The proximity of New Zealand to Australia makes Australia a preferred destination for exportedNew Zealand goods. Therefore, the strength of New Zealand's economy is closely tied to that of the Australian economy, which explains why the NZD/USD and the AUD/USDalso share a high positive correlation.

A weaker, but still importantcorrelation is that of gold prices and the Swiss franc (CHF). The country''s political neutrality and the fact that its currency used to be backed by gold have made the franc the currency of choice in times of political uncertainty. While the relationship has broken down at times, the CHF tends to rise when gold rises, and fall when gold falls.

The following chart shows the CHF/USD (inverted USD/CHF; red/green line) to the price of gold (blue line).

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 supplement to trading commodities. In addition to being able to capitalize on a similar outlook (higher oil, for example), traders may also be able to earn interest by holding higher interest rate currencies.

When trading currencies, weare dealing with countries, and countries have interest rates. For example, between 2016 and 2018, the Australian interest rate was higher than the US interest rate. Therefore, buying the AUD/USDafter gold bottomed in late 2015 would have not only produced a capital gain as gold and the AUD/USDrose in value, but the trader would have collected interest for every day the long AUD/USDposition was held.

Along the same lines, if you shorted AUD/USD to express a short gold view, you would end up paying interest each day.

If you're a commodity trader looking for a bit of a change, commodity currencies such as the AUD/USD and CAD/JPY provideopportunities worth looking into.

The Bottom Line

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 markets and the other eye on the currency market. 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 marketonto that of the currency market. It never hurts to be more informed about commodity prices, and how they drive currency movements.