The Relationship Between Commodity Prices and Currency Movements

Commodity prices and the currency movements have always been highly correlated, as change in one often impact the other. It is very important for Forex traders to anticipate changes in currency values and this relation in the Forex world is playing a very important role for it. From oil to gold or agricultural products, commodities are amongst the most actively traded items international markets. What you might not know about currency fluctuations is that their prices can reflect the strength or weakness of different currencies, thus having importance when trading or understanding currency.

The reason for this connection rests with the fact that many commodities are traded in US dollars. The prices of these commodities affect the value of the dollar, as countries that are big producers of the unprocessed goods need these exports as one of their main sources of money. For example, Canada, Brazil, and Australia are major exporting countries of such commodities as oil, or iron ore, or wheat. In these countries if the price of these goods rises, they tend to have stronger currencies since they get the revenues from their exports.

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At the same time, if commodity prices fall, these could be negative impacts for these countries. For instance, if the price of oil were to go down this might weaken the Canadian dollar as its economy is so dependent on oil exports. As a result, commodity prices become a ripple effect in the Forex market as traders then watch commodity prices to see how it’ll drive movement in the Canadian dollar and other currencies tied to commodities.

This is important for traders in the Forex market to understand because it helps them know which to choose. Commodity prices can often move well before currency movements and does present a very good opportunity to speculate on currency pairs linked to commodities. Technical analysis plays an important role in implementing a forex trading strategy and is also accompanied with an understanding of an on-going movement of commodity prices. For example, if a trader sees oil price going up, they may predict that the Canadian dollar should get stronger, relative to other currencies, and therefore be a good bet for profit.

But this relationship is not always such. Many things can affect both commodity prices and the currencies. Both, for example, can be influenced by geopolitical events, changes in global demand, or changes in the policies of central banks. Oil is produced in a place where geopolitical tension suddenly rises, say, but demand is not changing suprisingly much. The currency of a country depending on the oil import will weaken following the increased energy costs at the same time.

In addition, the commodity currency relationship isn’t limited to oil. Another key commodity with large impacts on currency values are gold. Normally, during economic uncertainty, the price of gold rises, increasing demand for countries with major gold producers, such as Australia and South Africa. And, just as that, commodities, like soy beans, or corn can affect the currencies of countries such as Brazil, for example, which also has an economy built on such things as agriculture.

In Forex trading, traders stay on top of these exposure connections and this puts them in a better position. Traders are keen on watching both the commodity price trends and the overall state of economy in order to better forecast currency movements and taking positions. Successful Forex trading means not only understanding how commodities influence currencies, but also understanding the impact that commodities have on global financial markets.