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Commodity price influence in Forex
Written by: PaxForex analytics dept - Thursday, 12 September 2013 0 comments
Predicting the next move in the markets is the key to making money in trading, but putting this simple concept into action is much harder than it sounds. The fact is that currencies are moved by many factors - supply and demand, politics, interest rates, economic growth and so on. 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.
When commodity prices are rising the economy is generally getting stronger and inflationary pressure is also rising. When commodity prices start to drop it usually means inflation and the economies overall are starting to slow down. These conditions affect the volume and price movements in the forex market. Keeping up to date with current world affairs can be a very good trait to have in forex trading.
The top three currencies that have the tightest correlations with commodities are the Australian Dollar, the Canadian Dollar and the New Zealand Dollar. Other currencies that are also impacted by commodity prices but have a weaker correlation are the Swiss Franc and the Japanese Yen. Knowing which currency is
correlated with what commodity can help traders understand and predict certain market movements.
Countries that rely heavily on imports of a specific commodity can experience volatile currency fluctuations when a commodity price has a substantial move. For example Japan is heavily dependent on the import of energy products including crude oil, coal and uranium. This import dependency makes the Japanese Yen vulnerable when these commodities experience dramatic moves. The majority of liquid global commodities such as petroleum, precious metals and grain are priced in terms of dollars. If the price of a commodity rises the value of the dollar rises.
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.