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 generally tend to move based on almost similar fundamental forces that affect some currency pairs. Four major currencies, the Canadian Dollar, the Swiss Franc the New Zealand Dollar and the Australian Dollar, are considered to be commodity currencies.
The CHF, CAD, AUD, and NZD all have strong correlation with gold prices. Natural gold reserves and currency laws in these countries result in almost mirror like movements between gold and these currencies. The CAD also tends to move 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 fundamentals behind these movements, their direction and strength could be an effective way to discover trends in both the markets. There is a strong relationship between the gold prices and US Dollar as well.
During unstable geopolitical times as well as when global recessionary fears become strong like that presently, investors tend to run away from US Dollar and instead turn to gold as a safe haven for their investments and hoard their wealth.
Therefore, as Dollar depreciates, gold prices tend to appreciate 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. AUD/USD, NZD/USD and USD/CHF currency pairs 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 usually considered to be a leading indicator of currency prices. As such, commodity block traders monitor gold and oil prices to forecast movements in currency pairs. The knowledge of this relationship between gold, oil and currencies can help forex traders to diversity their risk exposure using different products. The combination of gold and forex trading can be very profitable.
Gold and oil prices generally tend to move based on almost similar fundamental forces that affect some currency pairs. Four major currencies, the Canadian Dollar, the Swiss Franc the New Zealand Dollar and the Australian Dollar, are considered to be commodity currencies.
The CHF, CAD, AUD, and NZD all have strong correlation with gold prices. Natural gold reserves and currency laws in these countries result in almost mirror like movements between gold and these currencies. The CAD also tends to move 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 fundamentals behind these movements, their direction and strength could be an effective way to discover trends in both the markets. There is a strong relationship between the gold prices and US Dollar as well.
During unstable geopolitical times as well as when global recessionary fears become strong like that presently, investors tend to run away from US Dollar and instead turn to gold as a safe haven for their investments and hoard their wealth.
Therefore, as Dollar depreciates, gold prices tend to appreciate 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. AUD/USD, NZD/USD and USD/CHF currency pairs 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 usually considered to be a leading indicator of currency prices. As such, commodity block traders monitor gold and oil prices to forecast movements in currency pairs. The knowledge of this relationship between gold, oil and currencies can help forex traders to diversity their risk exposure using different products. The combination of gold and forex trading can be very profitable.
About the Author:
Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading and swing trading stocks and currencies. Know These Forex Broker Tricks. Learn Currency Trading!
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