Gold, Oil And The Forex Market

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Gold,oil and forex markets are intimately connected. As a forex trader, keeping an eye on the gold and oil markets can help you forecast price changes. Gold and oil prices are considered to be leading indicators in forex trading. The three markets, gold, oil and forex tend to move based on the same fundamentals.

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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!

Globalization has changed the nature of the global financial system. Now, most of the markets are interlinked. Commodities, stocks, futures, forex all these markets have now correlations that can be used by savvy traders in forecasting. Gold prices are reaching historical highs. Australia is a big exporter of gold as large gold mines are located in its interior. So when gold prices go high, AUD also tends to appreciate. On the other hand, when gold prices increases USD gets weak (gold and USD are negatively correlated). So this produces a double impact on the pair AUDUSD. What this means is that this is the best time to trade AUDUSD!

Wall Street analysts watch oil prices like hawks. During the early part of 2008, oil prices skyrocketed from near $75 to almost $140 within a few short months. This was more than a 100% increase in oil prices in a few months. All over the world, countries started feeling huge pressures on their balance of payment accounts. Many hedge fund managers heavily speculated on the increase in oil price.

When oil prices go up invariably recession starts in most economies and stock prices go down. The less the prices become, the more Wall Street becomes exuberant about the profit potential of companies. This increased exuberance translates into increase in stock prices. Two large futures exchanges are used to determine the prices of crude oil. One is the New York Mercantile Exchange (NYME) and the other is the International Petroleum Exchange (IPE).

Let’s take a look at it more closely to understand the two effects that pull USD with oil. When oil prices increase, the demand for US Dollar also increases. Most of the countries need US Dollar to pay for their oil imports. High demand for US Dollar means that it should appreciate.

Take Canada that has huge oil reserves after Saudi Arabia. The effect would be depreciation in the value of USD/CAD pair. US imports more oil from Canada than any other country. And if you are watching a currency pair that involves USD and a currency whose economy is harmed by the rising prices of oil, the demand for USD will rise.

So what we can say is that some currencies have positive correlation with oil prices and other currencies have negative correlation. The currency pair CAD/JPY shows the strongest reaction to rising oil prices. Japan imports almost 100% oil.


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June 29, 2010 · Filed Under Finance

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