Commodity Correlation - Three Major Correlations You Must Learn

The performance of the country and big trades in the country with others influence the currency. If a country is a major exporter of a good then everyone else will need to buy the currency for facilitating the trades. In such scenario the currency will rise. The demand of that good will move the currency up or down. Few commodities give an indication of a move in certain currency pairs. By recognizing this indication early, you can make money from the markets. One advantage of this correlation is that usually you require lot of initial capital to trade the commodities conservatively. Trading currency requires lesser capital. You can opt to trade currencies and trade the commodities indirectly.

The Oil Play of Canadian Dollar

One prominent commodity correlation is between oil and Canadian dollar. Canada is one of the largest producers of oil. Canadian dollar is positively correlated with the price of oil. As the oil drops in value, Canadian dollar also drops. In relation to this, when oil becomes costly, USD/CAD pair falls and when oil falls, USD/CAD increases.

Play Japanese Yen Based on Oil

The other commodity correlation is CAD/JPY. Japan imports almost all of the oil. It ranks third as oil importer after US and China. Japanese Yen is more susceptible to oil because of the dependence of its economy on oil import. 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 worlds third largest producer of gold. So when the price of gold appreciates, the Australian dollar will also appreciate in value against US 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. Because of its geographical location, New Zealand is highly correlated with Australia. The Kiwi economy is strongly tied with the Aussie 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 it still stands at respectable figure of 78%.

There is a high correlation between the commodities and above currencies. But you can also find the aberration from this connection. Be sure to pay attention to the possible diversion when you wish to play this correlation. If it shows the convergence, you can go on with the trade.

The strength of commodity correlation will take you one step ahead of the masses. In every trade, one with the edge always wins. 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.