🛢️ How Do Commodities Affect Forex?
Commodity prices significantly impact forex markets, especially for commodity-exporting countries. Currencies like AUD, CAD, NZD, and NOK are closely tied to commodity prices, making commodity analysis essential for fundamental analysis and trading these pairs.
Introduction to Commodity-Forex Relationship
Commodity-exporting countries' currencies move in correlation with commodity prices. When commodity prices rise, these currencies typically strengthen, and vice versa. Understanding this relationship is crucial for trading commodity currencies.
Why Commodities Matter for Forex
- Direct Correlation: Commodity currencies follow commodity prices
- Economic Impact: Commodities drive export revenues
- Trading Opportunities: Clear trends and correlations
- Fundamental Analysis: Core of fundamental analysis
- Risk Sentiment: Commodities reflect global growth
Key Commodity-Currency Relationships
1. Oil and CAD (Canadian Dollar)
Relationship:
- Canada is major oil exporter
- CAD strengthens when oil prices rise
- CAD weakens when oil prices fall
Trading Impact:
- Oil price increase = USD/CAD falls
- Oil price decrease = USD/CAD rises
- Strong correlation (0.7-0.9)
2. Gold and AUD (Australian Dollar)
Relationship:
- Australia is major gold exporter
- AUD correlates with gold prices
- Also affected by iron ore prices
Trading Impact:
- Gold price increase = AUD/USD rises
- Gold price decrease = AUD/USD falls
- Moderate correlation (0.5-0.7)
3. Oil and NOK (Norwegian Krone)
Relationship:
- Norway is major oil exporter
- NOK strengthens with oil prices
- Strong correlation
Trading Impact:
- Oil price increase = EUR/NOK falls
- Oil price decrease = EUR/NOK rises
4. Dairy and NZD (New Zealand Dollar)
Relationship:
- New Zealand exports dairy products
- NZD affected by dairy prices
- Also affected by agricultural commodities
Trading Impact:
- Dairy price increase = NZD/USD rises
- Dairy price decrease = NZD/USD falls
Major Commodities
1. Crude Oil
Impact: Very High Affected Currencies: CAD, NOK, RUB, MXN
Factors Affecting Oil:
- OPEC decisions
- Global demand
- Geopolitical events
- US shale production
Trading Strategy:
- Monitor oil prices
- Trade CAD pairs based on oil
- Use trend following
2. Gold
Impact: High Affected Currencies: AUD, USD (inverse)
Factors Affecting Gold:
- Interest rates
- Inflation expectations
- Geopolitical risks
- USD strength
Trading Strategy:
- Gold up = AUD up (generally)
- Gold down = USD up (safe haven)
- Use fundamental analysis
3. Iron Ore
Impact: High Affected Currencies: AUD
Factors Affecting Iron Ore:
- Chinese demand
- Global construction
- Supply disruptions
Trading Strategy:
- Monitor iron ore prices
- Trade AUD pairs accordingly
Commodity Trading Strategies
Strategy 1: Correlation Trading
Approach: Trade currency based on commodity price.
Steps:
- Identify commodity-currency correlation
- Monitor commodity price
- Enter currency trade in correlation direction
- Use proper risk management
- Exit when correlation breaks
Example:
- Oil prices rising
- Enter long USD/CAD (CAD strengthening)
- Exit when oil reverses
Strategy 2: Divergence Trading
Approach: Trade when correlation breaks.
Steps:
- Identify normal correlation
- Wait for divergence (currency not following commodity)
- Enter expecting correlation to return
- Use mean reversion approach
Risk: High (divergence may continue)
Strategy 3: Fundamental Analysis
Approach: Analyze commodity fundamentals.
Steps:
- Understand commodity supply/demand
- Analyze economic factors
- Predict commodity price direction
- Trade currency accordingly
- Use fundamental analysis tools
Best Currency Pairs for Commodity Trading
Oil-Related Pairs
- USD/CAD: Oil correlation
- EUR/NOK: Oil correlation
- USD/MXN: Oil correlation
Gold-Related Pairs
- AUD/USD: Gold correlation
- XAU/USD: Direct gold trading
Agricultural Pairs
- NZD/USD: Dairy/agricultural correlation
- AUD/USD: Agricultural exports
Commodity Trading Checklist
Before trading commodity currencies:
- [ ] Commodity price trend identified
- [ ] Currency-commodity correlation confirmed
- [ ] Economic factors analyzed
- [ ] Strategy prepared
- [ ] Stop loss set
- [ ] Take profit set
- [ ] Risk/reward ratio at least 1:2
- [ ] Position size calculated using risk management rules
Common Commodity Trading Mistakes
- Assuming Perfect Correlation: Correlations can break
- Ignoring Other Factors: Not just commodities matter
- No Stop Loss: High risk
- Wrong Timeframe: Using inappropriate charts
- Over-trading: Too many positions
When Commodity Trading Works Best
Ideal Conditions
- Strong Correlation: Clear commodity-currency link
- Trending Commodity: Clear price direction
- Major Commodities: Oil, gold, major agricultural
- Major Pairs: High liquidity
Avoid When
- Weak Correlation: Unclear relationship
- Ranging Commodity: No clear direction
- Minor Commodities: Limited impact
- Exotic Pairs: Wide spreads
Summary
Commodity prices significantly impact forex markets, especially for commodity-exporting countries. Success requires understanding correlations, monitoring commodity prices, and proper risk management.
Key Takeaways:
- Commodity currencies follow commodity prices
- Oil affects CAD, NOK strongly
- Gold affects AUD
- Monitor commodity trends
- Understand correlations
- Use proper risk management