Know The Relationship Between Gold, Oil And Forex!
Know The Relationship Between Gold, Oil And Forex!
Article by Ahmad Hassam
Gold and oil prices can be taken as leading indicators in currency trading. There is an intimate connection between gold, oil and currency markets as they all tend to move on the same fundamentals. Professional traders always watch the gold and oil markets to know in advance what can happen in the currency market.
There are four currencies that are intimately correlated with gold and oil prices. These currencies are the Australian Dollar (AUD), the Swiss Franc (CHF), Canadian Dollar (CAD) and the New Zealand Dollar (NZD). These four currencies are popularly known as Commodity Currencies. The correlation between gold and AUD, CHF and NZD is strong. However, the correlation between CAD and oil prices is not that strong but can still serve as a leading indicator.
Gold and US Dollar (USD) are negatively correlated. When USD depreciates or becomes weak, gold prices tend to go up. Especially in times of political and financial crisis, investors tend to flee the USD and take refuge in gold. Gold is still considered as the ultimate safe haven by investors. This has something to do with the perceptions for gold that have been fashioned over thousands of years of human history. So the currency pairs USDCHF, AUDUSD and NZDUSD tend to mirror the movements in the gold market. One of the popular currency pairs that is traded by forex traders is the pair USDCHF. So if you are trading this currency pair, you should always keep an eye on the gold market.
CAD is the only commodity currency that is correlated with oil and not gold. This has to do with the Canadian economy that is heavily dependent on heating oil during the long winter season. Canada is also a major exporter of oil to US. When oil prices rise, oil demand in US falls reducing the demand for CAD. This negative correlation between oil and CAD is however not very strong.
We are living in a different world. Globalization has changed the basic structure of the global financial system. If Tokyo Stock Market falls, it ripples through the rest of the global system. Likewise what happens in the commodity market also ripples through other markets. Stocks, forex, futures & commodities, all these markets are now highly interlinked and professional traders have to keep an eye on what is happening in the different markets so as not be caught unaware. Righ now, gold prices are at their historical highs. Australia has large gold mines and is a leading exporter of gold. When gold prices rise, AUD tends to appreciate. On the other hand, USD dpreciates with rise in gold prices as both have a strong negative correlation. This produces a double effect on the currency pair AUDUSD as one currency is going up and the other is going down at the same time. What this means is the with the rise in gold prices the currency pair AUDUSD will also rise. This is the best time to trade AUDUSD!
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