Commodity Correlation - 3 Key Correlations You Must Know - By: Matthew John

The price of a currency moves according to the performance of the country and major trades happening in that country. If a country is a major exporter of a good then everyone else will need to buy the currency for facilitating the trades. In such scenario the currency will rise. The demand of that good will move the currency up or down. Few commodities give an indication of a move in certain currency pairs. You can stay ahead of the curve by recognizing the commodity correlation in advance. One advantage of this correlation is that usually you require lot of initial capital to trade the commodities conservatively. Trading currency requires lesser capital. So instead of directly trading the commodities, you can trade the currency pairs, which track the commodities.

Trade Oil Indirectly

One of the leading commodity correlation exists between oil and Canadian dollar. Canada is amongst the largest producers of oil. Canadian dollar is positively correlated with the price of oil. As the oil drops in value, Canadian dollar also drops. In response to this, the currency pair USD/CAD pair decreases when oil price increases and when oil decreases, USD/CAD increases.

Play Japanese Yen Based on Oil

Commodity correlation is also found between oil and CAD/JPY. Japan imports almost all of the oil. It ranks third as oil importer after US and China. So the Japanese Yen is vulnerable to the fluctuations in the oil prices. When oil price increases lot of Japanese Yen will be traded for Canadian dollar. As a result the CAD/JPY rises. CAD/JPY will depreciate when oil price decreases. There is 80% correlation between CAD/JPY and oil.

Exposure to Gold through Aussie Dollar

Another important commodity correlation is that of gold with the Australian dollar. Australia is the leading producer of gold. There is a strong positive correlation between gold and Australian dollar. If gold loses its shine, Australian dollar will also drop. Australian dollar is closely tied to gold. If you track gold, you can trade AUD/USD easily. New Zealand is very close to Australia and it exports heavily to Australia because of that geographical proximity. The economy of New Zealand has a strong connection with the Australian economy. It reflects in the correlation between the currencies of these countries. Although its correlation with gold is not as tightly as it is with Aussie dollar. But you can not ignore the correlation figure between Kiwi dollar and gold of 78%.

You can find a close connection between commodities and currencies. But there are instances when these two don’t move in the same direction strongly. So when you want to play with this information, you may want to check the divergence with the help of indicator. In the absence of divergence, you can go ahead with this strategy.

The strength of commodity correlation will take you one step ahead of the masses. It is he, who has the advantage of information makes money in the market. You may not want to play purely based on the correlation of the currency with the particular commodity. But this information will give you an informational edge. If this correlation complements your other analysis, then you can go into the trade with more confidence.

About the Author

Knowing this relations can make you a better trader. Check out AvaFX review for encouraged place to trade. In addition, discover the advised working strategies on best forex trading strategy.

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