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Commodities Influence on Currency Prices
Written by: PaxForex analytics dept - Thursday, 12 April 2018 0 comments
When trying to distinguish the relationships between certain commodities and currencies around the world it helps to realize that situations can change and the relationships are fluid. However, there are some time-tested relationships that have been established over the years that may continue to hold true well into the 21st century. As commodities in the financial market have the same role as stock and currency, the ups and downs of commodity prices could significantly affect forex market. Some commodities, such as Crude Oil and Gold are well-known as strong influences toward USD and other currencies.
There is normally an inverse relationship between the value of the dollar and commodity prices. The prices of commodities have historically tended to drop when the dollar strengthens against other major currencies, and when the value of the dollar weakens against other major currencies, the prices of commodities generally move higher. This is a general rule, but it is often held true over time. As a general rule, you'll see that commodities tend to move lower when the dollar moves higher, and the opposite occurs as the dollar moves lower. The correlation isn't perfect, but there's often a significant inverse relationship over time.
Correlations between commodities prices and currency markets can help traders understand how the markets work and develop trading strategies based on them. Commodities, as well as the currencies in forex, are heavily influenced by market fundamentals. In particular, gold and oil have an important relationship
with the forex market and can be used as indicators when trading the currency market. The prices of raw materials or commodities are affected by market fundamentals. Particularly gold and oil have a very important relationship with the Forex market, which can be favorably used when operating.
Correlations between currencies and commodities are not an exact science. Often correlations break down and may even reverse for extended periods. Traders must remain vigilant in monitoring correlations for opportunities. Correlation indicators or monitoring charts are two ways of completing this task. After divergences, waiting for the commodity and currency to align with their respective trends can be a powerful signal - yet traders must accept those divergences can last a long time. Relationships may change over time as countries alter exports or imports, and this will affect correlations.
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 market and the other eye on the currency market to watch how quickly it responds. 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 market to that of the currency market. Bottom line: It never hurts to be more informed about commodity prices and how they drive currency movements.