Trading Ways of Currency and Commodity Relationships
The correlation between commodities and the most traded currency pairs is a common occurrence. For example, the Canadian dollar (CAD) correlates with oil prices due to exports, while Japan is vulnerable to oil prices because it imports most of its oil.
Similarly, Australia (AUD) and New Zealand (NZD) have close ties to the price of gold and oil prices. While the correlation (positive or negative) can be significant if forex traders want to benefit from it. Traders should find the right time to do a “correlation trading” correctly.
There will be no correlation and this can be very detrimental to the trader. This loss can happen because the trader does not understand what is going on. Recognizing the correlation, monitoring and timing is crucial to the success of trading based on the inter-market analysis provided by examining the relationship between currencies and commodities.
Not all currency / commodity correlations are worth trading. Traders need to take into account commissions and spreads, surcharges, liquidity and access to information. The most traded currencies and commodities will be easy to find adequate information, spreads and liquidity.
Canada is a major exporter of oil, and thus its economy is affected by oil prices and quantities that can be exported. Japan is a major importer of oil, and thus oil prices and quantities to be imported affect the Japanese economy. Due to the large influence of oil in Canada and Japan, CAD / JPY is positively correlated with oil prices. The disadvantage is that CAD / JPY generally has higher spreads and is less liquid than USD / CAD. Because US dollar-based oil prices are in most parts of the world, fluctuating dollars have an impact on oil prices (and vice versa). Therefore USD / CAD can also be monitored considering both countries are major oil importers and exporters.