The Relationship between Commodities and Forex

Gold and oil in particular have an important relationship with the forex market, and can be used as leading indicators in forex trading. Four major currencies are considered to be the closest tied to commodity prices – the Australian Dollar, the Canadian Dollar, the New Zealand Dollar and the Swiss Franc.

Gold and it’s relationship to the Forex Market

While the US is the world’s second largest producer of gold, after South Africa, gold normally does not move in line with the US Dollar, rather they tend to have an inverse relationship. This is because during periods of geopolitical uncertainty traders tend to migrate away from the US Dollar and towards gold as a safe haven.

In the world of Forex, no major currency is considered to be as safe and stable as the Swiss Franc. The political neutrality of the Swiss and the fact that 40% of its currency reserves were previously backed by gold underpin the Swiss Franc’s image as being a safe haven during periods of uncertainty. For these reasons the CHF/USD has a strong positive correlation with gold prices.

The AUD/USD, NZD/USD, USD/CHF currency pairs tend to trade in line with gold the closest, due to the other currency having close political and natural ties to gold.

Oil and it’s relationship to the Forex Market

Canada’s total crude oil reserves stand in second place behind Saudi Arabia. The Canadian Dollar is the currency most influenced by rising oil prices- if oil prices rise the CAD is likely to closely follow. Rising oil prices benefit the Canadian economy as it takes in more money for oil and raises profits for domestic oil companies. The US imports 85% of Canada’s oil exports. Rising oil prices have in part caused the Canadian dollar to rise to a 28 year high against the US dollar.