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Masters Class: Commodities and currency pairs

2019-3-12 20:13 | By : MEX Analyst Team

Among different types of commodities, the most well-known are crude oil and gold. Although their prices seem to be inconsistent with currency pairs price, professional analysts are able to deduct relationship between them, and utilize it to make profits.

In fact, crude oil and gold are inextricably linked to certain currency pairs. They are hard to explain, therefore, today I will directly use the results of the analysis to teach you how to use the price changes of commodities to make forex investment decisions.


The most classic example is gold and the dollar. They are related in two ways. First, since gold price is expressed in the unit of US dollar, the rise in the US dollar index will lead to an increase in the price of gold, keeping other factors constant. It is because the appreciation of the dollar represents an increase in the purchasing power of the dollar, which mean we can use less dollar to buy the same amount of gold. In the second aspect, the US dollar is the most circulated currency in the world, and its price reflects the global economic outlook to some extent. The decline in the US dollar index largely reflects the poor outlook of the global economy, so capital will flow to safe-haven instruments, and rising demand will push gold prices upward. Let's look at the trend of the past five years:

As can be seen from the above chart, gold is inversely proportional to the US dollar index. Combining with the above analysis, we can observe that the price change of the US dollar index will cause the gold price to change in the opposite direction. Mathematically, the slope of the red line in the above chart is -0.9933, which is close to 1, indicating that the change in the dollar index x% leads to a negative x% change in the gold price. At the same time, the correlation between the two is -0.5967, indicating that the relationship is highly reliable.

In addition to the US dollar, the Australian dollar is also closely related to gold. Maybe you can make a guess: Australia is the second-largest gold producer in the world, so how does the price change of gold affect the Australian dollar, or more precisely, how does it affect the Australian dollar against the US dollar?

Do you think the trend between the two is very similar? Intuitively, Australia is the second largest gold producer in the world. When the price of gold rises, people need more Australian dollars to buy the same amount of gold, so the demand for the Australian dollar rises and the Australian dollar price rises consequently.

Of course, the relationship between gold and the Australian dollar is not so obvious compared to gold and the dollar. But don't underestimate the correlation of gold prices on the Australian dollar. If you utilize it in a correct way, it can bring opportunities for profit.

Crude Oil

In terms of crude oil, the most familiar within the market is the Canadian dollar against the US dollar. Crude oil is Canada's largest export and Canada is the largest supplier of crude oil to the United States. Therefore, when the demand for crude oil in the United States rises, the price of crude oil rises, people need to exchange more Canadian dollars to buy the same crude oil, so the price of the Canadian dollar against the US dollar will rise.

Mathematically, the correlation between the two is 0.869846, so it is very reliable. However, it is worth noting that the relationship between the Canadian dollar against the US dollar and crude oil prices has weakened in the past five years due to global economic fluctuations.

The reasons are that there are too many factors affecting commodities and exchange rates, and the market is full of noise, so the correlation of prices has weakened. However, we reiterate that this article does not encourage investors to look at the changes in commodities as an signal of buying and selling currency pairs, but to encourage investors to include analysis of commodities and make more comprehensive and accurate judgments when doing macro-level fundamental analysis.

Hope you find this article useful. See you!

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