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The price of a currency moves according to the performance of the country and major trades happening in that country. Others will have to buy the currency of the particular country if that country is the major producer of certain goods. The value of currency in this case will appreciate. The demand of that good will move the currency up or down. Many currency pairs move according to certain commodities. You can stay ahead of the curve by recognizing the commodity correlation in advance. You can use the correlation to your advantage because unlike commodities, commodities trading requires lot of initial capital. On the contrary currency trading requires much less capital even with stringent risk management. You can opt to trade currencies and trade the commodities indirectly. Trade Oil Indirectly One prominent commodity correlation is between oil and Canadian dollar. Canada is amongst the largest producers of oil. When the price of oil drops, the price of Canadian dollar decreases, as fewer Canadian dollars are required than when the price was higher. When the oil price rises, the opposite happens. In relation to this, when oil becomes costly, USD/CAD pair falls and when oil falls, USD/CAD increases. Exploit the Oil Dependency of Japan Commodity correlation is also found between oil and CAD/JPY. Japan doesn’t produce any oil so it has to import oil for domestic consumption.. It ranks third as oil importer after US and China. So the Japanese Yen is vulnerable to the fluctuations in the oil prices. As the price of oil rises, more Canadian dollars will required and hence the more Japanese Yen will be sold. Consequently CAD/JPY will increase. CAD/JPY will depreciate when oil price decreases. The correlation between this pair and oil is 80%. Exposure to Gold through Aussie Dollar Other common commodity correlation is between the gold and Australian dollar. Australia is the world’s third largest producer of gold. There is a strong positive correlation between gold and Australian dollar. If gold loses its shine, Australian dollar will also drop. Australian dollar is closely tied to gold. If you track gold, you can trade AUD/USD easily. New Zealand is very close to Australia and it exports heavily to Australia because of that geographical proximity. The economy of New Zealand has a strong connection with the Australian economy. It reflects in the correlation between the currencies of these countries. The correlation between gold and New Zealand dollar is not as strong as that of Australian dollar. But you can not ignore the correlation figure between Kiwi dollar and gold of 78%. There is a high correlation between the commodities and above currencies. But there are instances when these two don’t move in the same direction strongly. So when you want to play with this information, you may want to check the divergence with the help of indicator. In the absence of divergence, you can go ahead with this strategy. The importance of commodity correlation lies in the fact that it gives you an edge. It is he, who has the advantage of information makes money in the market. You may not want to play purely based on the correlation of the currency with the particular commodity. But this correlation will give you the confidence to jump in the trade. The correlation can be treated as a supplementary to your analysis. Knowing this relations will make you a better trader. Check out Ava FX review for encouraged place to trade. Also, find out the recommended working strategies on best forex trading strategy.
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currency trading, commodity correlation, forex, finance,
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