subject: Gold, Oil And Forex! [print this page] Gold and oil prices can be taken as leading indicators in currency trading. There is an intimate connection between gold, oil and currency markets as they all tend to move on the same fundamentals. Professional traders always watch the gold and oil markets to know in advance what can happen in the currency market.
There are four currencies that are intimately correlated with gold and oil prices. These currencies are the Australian Dollar (AUD), the Swiss Franc (CHF), Canadian Dollar (CAD) and the New Zealand Dollar (NZD). These four currencies are popularly known as Commodity Currencies. The correlation between gold and AUD, CHF and NZD is strong. However, the correlation between CAD and oil prices is not that strong but can still serve as a leading indicator.
Now, over the centuries people have been smitten by the lure of gold. Remember the California Gold Rush of the 19th century when people went to the wilderness in California in search of gold. This same perception still continues in the minds of investors and in times of political and financial crisis, people tend to seek refuge in gold as a safe haven investment. Precisely this same phenomenon is shaping in front of our very own eyes, as people are abandoning the US Dollar (USD, the world's reserve currency and taking shelter in gold. Gold and USD are negatively correlated. Gold is also known as Antidollar. When USD rises, gold prices fall and when USD falls, gold prices rise. This is exactly what is happening right now. The currency pairs AUDUSD, NZDUSD and USDCHF tend to mirror gold prices. Now, USDCHF is a popular currency pair among forex traders. CHF is highly correlated with gold prices. This has something to do with the gold reserves held by the Swiss government. In times of financial crisis, investors tend to buy CHF. So, if you want to trade USDCHF, you should watch the gold market too!
CAD is the only currency pair in the commodity currencies that is somewhat correlated with oil prices. Oil drives the global economy. Rising oil prices produce inflation and slows down the global economy. Now, Canada is one of the biggest exporter of oil to US. Canadian economy is heavily dependent on heating oil as the winters are long and people use heating oil extensively during the winters.
We are living in a different world. Globalization has changed the basic structure of the global financial system. If Tokyo Stock Market falls, it ripples through the rest of the global system. Likewise what happens in the commodity market also ripples through other markets. Stocks, forex, futures & commodities, all these markets are now highly interlinked and professional traders have to keep an eye on what is happening in the different markets so as not be caught unaware. Righ now, gold prices are at their historical highs. Australia has large gold mines and is a leading exporter of gold. When gold prices rise, AUD tends to appreciate. On the other hand, USD dpreciates with rise in gold prices as both have a strong negative correlation. This produces a double effect on the currency pair AUDUSD as one currency is going up and the other is going down at the same time. What this means is the with the rise in gold prices the currency pair AUDUSD will also rise. This is the best time to trade AUDUSD!
by: Ahmad Hassam
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