Commodity Correlation - 3 Key Correlations You Must Learn

The price of a currency moves according to the performance of the country and major trades happening in that country. Others will have to buy the currency of the particular country if that country is the major producer of certain goods. The value of currency in this case will appreciate. The currency hence will move depending upon the demand of that good. 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. Trade Oil Indirectly One of the leading commodity correlation exists between oil and Canadian dollar. Canada is amongst 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 response to this, the currency pair USD/CAD pair decreases when oil price increases and when oil decreases, USD/CAD increases. Exploit the Oil Dependency of Japan The other commodity correlation is CAD/JPY. Japan imports almost all of the oil. Japan is the third largest importer of oil. So the Japanese Yen is vulnerable to the fluctuations in the oil prices. When oil price increases lot of Japanese Yen will be traded for Canadian dollar. Consequently CAD/JPY will increase. CAD/JPY will depreciate when oil price decreases. There is 80% correlation between CAD/JPY and oil. Play with Yellow Metal through Aussie Other common commodity correlation is between the gold and Australian dollar. Australia is the leading producer of gold. There is a strong positive correlation between gold and Australian dollar. As the price of gold drops, Australian dollar also drops. There is a strong correlation between the gold and the Australian dollar. 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%. You can find a close connection between commodities and currencies. But there are instances when these two don’t move in the same direction strongly. So when you want to play with this information, you may want to check the divergence with the help of indicator. In the absence of divergence, you can go ahead with this strategy. 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.