forex trading

Correlation Between Commodities and the Forex Market

There is a visible correlation between tradable commodities and currency pairs in the forex market.

Aspects of international trade mainly drive this correlation. Assume that a country ‘A’ exports a lot of commodity ‘X’ when the prices of commodity ‘X’ increases, the currency of country ‘A’ is likely to appreciate. Conversely, when the prices of commodity ‘X’ drop, it is more likely that the currency of country ‘A’ will depreciate.

In another scenario, if country ‘A’ imports a lot of commodity ‘Y’; when the prices of commodity ‘Y’ increases, the currency of country ‘A’ is likely to depreciate relative to others. Conversely, the currency of country ‘A’ will likely appreciate relative to others when the prices of commodity ‘Y’ drops.

In this article, we will analyze some of the most commonly traded commodities alongside currency pairs that are most likely to be impacted by their price fluctuations.

CAPEX.com global brokers also have a variety of tradable commodities CFDs which you may use to keep track of the changes in the prices of these commodities.

West Texas Intermediate Crude Oil and the USD/CAD Pair

Canada ranks thirds in terms of oil exports and is the fourth-largest producer of oil in the world. The major importer of Canadian oil is the US – about 98%. Therefore, Canada is considered one of the leading suppliers of oil to the US; contributing about 43% of the total US oil imports. Since the WTI crude oil is the most traded in North America, it stands to reason that the fluctuation of the Canadian Dollar is tied to the value of the WTI oil. The price of the WTI crude oil refers to the price of the New York Mercantile Exchange (NYMEX) WTI Crude Oil futures contract or the contract itself.

We can expect that when the price of the WTI crude oil falls, the USD/CAD pair rises. Since the US is a net importer of Canadian oil, the USD will appreciate relative to the CAD.

When the price of the WTI crude oil increases, the USD/CAD pair is expected to drop. The CAD will be expected to appreciate relative to the USD.

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Brent Crude Oil and USD/NOK Pair

Brent crude oil is the most traded oil in Europe, and it comes from four main oil fields in the North Sea. They are Oseberg, Ekofisk, the Forties, and Brent. In the commodities market, nearly two-thirds of all crude oil contracts use Brent crude oil prices as the benchmark. Note that the popularity of the Brent crude oil comes from the fact that it is water-borne and can thus be easily transported quickly to far regions.  Furthermore, Brent crude oil is easily refined into other products.
Norway is the second-largest oil producer in Europe and oil exports account for nearly 41% of the country’s total exports and 17% of the GDP. Being the largest exported product from Norway, we can expect that the Norwegian krone appreciates and depreciates against other currencies depending on the price fluctuation of the Brent crude oil.
The Brent crude oil prices have an inverse relationship with the price of the USD/NOK pair. Since the Norwegian economy is dependent on the Brent crude oil, the NOK will appreciate when the Brent oil prices rise and depreciate against other currencies when the Brent oil prices fall. We can expect that the USD/NOK pair to be bullish when the prices of the Brent crude oil drops and bearish when the Brent oil prices increase.

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Japan is considered the fourth largest importer of Brent crude oil. Thus, when the prices of the Brent crude oil increases, we can expect the JPY to depreciate against the NOK.
As shown in the screengrab below, the price of the NOK/JPY pair has a direct relationship with the price of the Brent crude oil.

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Gold and the AUD/USD Pair

Australia is the second-largest producer of gold behind China; with about 319 metric tons. More so, it has the world’s largest gold reserves of about 9800 tons. Therefore, the price of gold is positively correlated to the fluctuation of the value of the Australian Dollar relative to other currencies.

When the price of gold increases, the AUD/USD pair is expected to adopt a bullish stance since the AUD is expected to appreciate relative to the USD. Conversely, when the price of gold falls, the AUD/USD pair is expected to adopt a bearish stance since the AUD is expected to depreciate relative to the USD.

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Note that since New Zealand is closer to Australia, the economy of these two countries tends to be highly intertwined. Thus, a positive correlation between the NZD/USD pair and the price of gold should also be expected.

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Silver and the AUD/USD Pair

Australia ranks among the top producers of silver globally while the US is the second-largest consumer of silver behind India. Therefore, it is to be expected that an increase in the price of silver will make AUD appreciate relative to the USD. Conversely, when the price of silver falls, it is expected that the AUD will depreciate relative to the USD. Thus, the AUD/USD pair will adopt a bullish trading pattern when the price of silver is rising and a bearish stance when the price of silver is dropping.

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As with the correlation with gold, the NZD is expected to have a direct relationship with silver. This correlation is due to New Zealand’s economic proximity to Australia.

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Bottom Line

The relationship between the prices of the commodities and the fluctuation of currency pairs in the forex market may not always hold. There are instances when the relationships we have analyzed above have broken down. Therefore, while these relationships hold, most of the time, it is always advisable that, as a trader, you conduct further analysis of the different currency pairs and the prices of these commodities.

Furthermore, be sure to follow market news and continuously monitor the developments in the commodities market. CAPEX.com provides an up-to-date curated global news section which can be helpful in your analysis.