Expert FX traders have known for decades that trading currencies necessitate looking outside of the FX market. Currencies are moved by many factors, including supply and demand, politics, interest rates, speculation, and economic growth.
The prices of numerous global commodities, such as oil, gold, metals, and even agricultural items, significantly impact the value of several currencies. This influence may be positive or negative depending on whether these commodities are big exports or imports for the countries behind the currencies. You may easily trade such currencies once you understand this correlation.
Gold
For centuries, gold has been used as a medium of exchange and a store of wealth. In the past, several national currencies, such as the US dollar, were even redeemable for gold. Gold can also be used as a hedge against inflation, which can devalue paper fiat currencies over time.
Gold is a currency with the ISO currency code XAU. Gold spot prices, also known as FX gold rates, are often expressed as XAUUSD, XAUEUR, or XAUGBP. Most online FX companies offer spot gold trading. There are also currency pairs that are affected by gold.
AUDUSD
The inverse link between the US dollar and gold still exists today, albeit the mechanics have shifted slightly. Because of the dollar’s safe-haven appeal, investors flock to the dollar whenever economic difficulty is in the United States or throughout the world. When there are indicators of growth, the opposite occurs.
Australia is the world’s third-largest gold producer, last year alone, its gold exports were 257 tonnes, worth $24 billion. The AUDUSD has a positive correlation with gold. When gold rises, so does the AUDUSD. When gold falls in value, so does the AUDUSD. The AUDUSD had a stunning 80% correlation with the price of gold in the past.
USDCHF
The Swiss National Bank (SNB) is home to one of the world’s largest gold reserves. Before 2000, the country was on a gold standard, with the CHF being required by law to be backed by this precious metal. After the referendum in 2000, this rule was eventually repealed. Every year, Swiss refineries process 70% of the world’s raw gold.
The USDCHF has a negative correlation with gold. When the price of gold falls, the USDCHF normally rises. When the price of gold rises, however, the pair falls.
Oil
Crude oil is a vital part of the global economy. It is well known for producing gasoline, which is used in almost every automobile. Oil is also used to generate natural gas, asphalt, all plastics, and food-protecting pesticides, all of which are less well-known to the general public.
Oil is used in so many diverse ways that growing economies usually require a lot of it. The development of China and India as economic powerhouses has significantly altered the global oil demand equation. The Far East has also become a rising sponge for oil.
USDCAD
The United States is, without a doubt, the world’s top oil consumer. Canada has the world’s third-greatest oil reserves and is also the world’s fourth-largest oil exporter. Because Canada is a net oil exporter, its currency is heavily connected with oil prices in relation to the US dollar.
Supply and demand is another important factor that affects both Canadian and US currency demand and supply. Exports of crude oil account for a large percentage of US currency earned by Canada; hence changes in crude oil volume and price have a significant impact on the flow of US dollars into the Canadian economy.
The USDCAD and oil prices are positively correlated. The USDCAD tends to rise when oil prices fall. Oil price variations account for around 84% of the USDCAD price volatility. However, this does not mean that fluctuations in the US and Canadian currencies are solely due to changes in oil prices; rather, the two variables move in lockstep.
USDNOK
Brent crude oil is a type of North Sea oil that is largely traded in Europe. Although the oil in the North Sea is accessible to a number of countries, it is estimated that the Norwegian sector holds about 54% of the sea’s oil reserves.
Norway’s sovereign wealth fund, which is fueled by oil and gas revenues, is rising at a rate so fast that the Norwegian krone could become the world’s first global currency. Norway is the fifth-largest oil exporter and the third-largest gas exporter globally, with both industries contributing to more than 20% of the country’s GDP.
The USDNOK is inversely correlated to crude oil prices. When the price of oil rises, the USDNOK declines, and vice versa.
Silver
Silver is a treasured metal that is used extensively in jewelry and electronics. While it is not as scarce or coveted as gold, it is nevertheless one of the world’s most valuable metals and one of the most traded commodities.
Silver’s growing industrial applications account for a major portion of its demand. Silver has the highest electrical conductivity of any metal, making it an important component of sustainable infrastructure like solar panels. In addition, the metal has several medical applications.
AUDUSD
Australia today has the greatest chunk of the world’s economic silver resources, thanks to the discovery and exploitation of the Mount Isa, Hilton-George Fisher, Cannington, and McArthur River lead-zinc-silver deposits. Mining is a huge part of Australia’s economy, but few people realize how significant it is: it employs over 2% of the workforce, accounts for over 5% of GDP, and for around 35% of the country’s exports.
The AUDUSD and silver prices have a degree of positive association. The AUDUSD pair rises in tandem with the price of silver.
Summary
Commodities and currency pairs are more closely linked and more responsive to one another. Gold has a positive correlation with the AUDUSD pair and a negative correlation with the USDCHF. Oil has a negative correlation with USDCAD and USDNOK. Silver has a positive correlation with the Australian dollar (AUDUSD). A point to note is that when trading, make sure to conduct a thorough market analysis and not only depend on commodity correlations.