Correlation between currencies and oil or gold

By TechGuy - November 28, 2017



Correlation is a statistical term describing the relationship between two variables. Professional forex traders have long known that trading currencies requires looking beyond the world of forex, because 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 prices of the main commodities a country exports or imports. Highest correlations with gold and oil can be found with the Australian dollar (large gold exporter), and the Canadian dollar (large oil exporter). Another currency that is affected by oil prices but has a weaker correlation is the Japanese yen (large oil importer). Knowing which currency is correlated with which commodity can help you understand and predict certain market movements before they happen, increasing your chances of success.
Gold and the Australian dollar
Trading the Australian dollar (AUD) is very similar to trading gold. As the world's third-largest producer of the precious metal, the Australian dollar and the precious metal are highly correlated – for example, their monthly correlation between 2000 and 2012 was 89%. During times of market uncertainty such as economic or political troubles, gold, represented by the symbol XAU, serves as a safe haven and a hedge against inflation. As commodities such as gold act as a store of value that is likely to outlast market uncertainty in these troubled times, their price tends to rise. As gold is commonly traded against the USD, the two have a mostly inverse relationship, meaning that a higher gold price generally results in a weaker US dollar and vice versa. When the US dollar depreciates, it becomes cheaper to buy gold. Therefore AUD which is correlated to gold also rises. The AUD is commonly referred to as a commodity currency because of its heavy reliance on the export of metals such as gold.
The Canadian dollar and the Japanese yen
Just like the AUD is affected by the price of gold, the currency of a country like Canada which is a large oil producer tends to be affected by changes in the price of oil. The Canadian dollar (CAD) usually strengthens on increases in the price of oil, and weakens when oil price falls. On the other hand, a country like Japan which is heavily reliant on oil imports benefits when oil is cheap, but is Note that correlations can become stronger or weaker with time, and the relationship between AUD/USD & Gold and CAD/JPY & Oil is therefore not always stable. For this reason, as a trader you should always have a sufficiently funded account and be cautious when placing a trade on a currency pair based on recent oil or gold price moves, negatively affected when oil prices rise.

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