The relationship between crude oil, gold, and other commodities and exchange rates

Commodities are most commonly exposed to crude oil and gold. Although their prices may seem unrelated to the exchange rates of various countries, professional analysts can find the relationship and use it to develop foreign exchange trading strategies.

In fact, crude oil and gold are inextricably linked to certain currency pairs, making it difficult to explain in a few words. Therefore, today I will directly use the results of the analysis to teach you how to use commodity price changes to make foreign exchange investment decisions.

Crude oil and foreign exchange

In terms of crude oil, the most familiar in the industry is the Canadian dollar against the US dollar. Crude oil is Canada's largest export commodity, and it is also the largest supplier of crude oil to the United States. So when the demand for crude oil in the United States rises, the price of crude oil rises, and people need to convert more Canadian dollars to buy the same crude oil, so the price of the Canadian dollar rises against the US dollar.

Mathematically, the correlation between the two is as high as 0.869846, so it is very reliable. However, it is worth noting that the relationship between the Canadian dollar and the price of crude oil has weakened in recent years due to global economic fluctuations.

Gold and foreign exchange

The classic example is gold and the dollar. They are related in both respects.

First, since gold is priced in dollars, a rise in the dollar index, other external factors being equal, would cause the price of gold to rise, because an appreciation of the dollar represents an increase in dollar purchases, allowing for the same amount of gold to be purchased with fewer dollars.

Second, as the most liquid currency in the world, the price of the US dollar reflects the global economic outlook to some extent. The decline of the US dollar index largely reflects the poor global economic outlook, so funds will flow to safe-haven instruments, and rising demand will drive the price of gold upward. Let's take a look at the trend over the past five years:

The relationship between gold and the US dollar is inverse, and the price movement of the US dollar index will cause the price of gold to move in the opposite direction.

In addition to the US dollar, the Australian dollar is also closely related to gold. Before I go straight to the analysis results, investors can try to guess. As the second largest producer of gold in the world, how will the price of gold in Australia affect the Australian dollar, or more specifically, how will it affect the Australian dollar against the US dollar?

Do you think the trend of the two is very similar? Intuitively, Australia, as the world's second largest producer of gold, when the price of gold rises, people need more Australian dollars to buy the same amount of gold, so the demand for Australian dollars rises, and the price of Australian dollars naturally rises.

Of course, the relationship between gold and the Australian dollar is not so obvious when compared to gold and the US dollar. But don't underestimate the implications of gold prices for the Australian dollar, taking advantage of it will bring profit opportunities.

There are too many factors affecting commodities and exchange rates, and the market is full of noise. We are not saying that the movement of commodities can be directly used as a guide for buying and selling foreign exchange, but to encourage investors to include the analysis of commodities in their macro fundamental analysis and make more comprehensive and accurate judgments.