currency movements:

currency movements:



Predicting the next move in the markets is the key to making money in trading - but putting this simple concept into action is much harder than it sounds. Professional forex traders have long known that trading currencies requires looking beyond the world of FX. The fact is that currencies are moved by many factors - supply and demand, politics, interest rates, economic growth, and so on. More specifically, since economic growth and exports are directly related to a country's domestic industry, it is natural for some currencies to be heavily correlated with commodity prices. The top three currencies that have the tightest correlations with commodities are the Australian dollar, the Canadian dollar and the New Zealand dollar. Other currencies that are also impacted by commodity prices, but have a weaker correlation, are the Swiss franc and the Japanese yen. Knowing which currency is correlated with what commodity and why can help traders understand and predict certain market movements. Here we look at currencies correlated with oil and gold and show you how you can use this information in your trading.



In 2005, oil and gold set record highs and were two of the biggest drivers of currency movements that year. In fact, the dollar reacted very differently across various currencies simply because of that particular currency's correlation with commodity prices. Therefore, knowing what type of movement to expect in the Canadian dollar if oil prices drop, for example, will definitely help you make smarter decisions.

Oil and the Canadian Dollar
Oil is one of the world's basic necessities - at least for now, most people in developed countries cannot live without it. In 2005, the price of oil at its peak was close to 65% higher than where it started in January of the same year. Since hitting a high above $70 a barrel in August 2005, oil prices retraced 18%, ending 2005 approximately 40% higher. There was a time when we would expect such volatility only from a penny stock, but this has become our reality. The rise in oil prices has brought a great big smile to the faces of oil producers - and a nice fat boost to their pocketbooks. Oil consumers, on the other hand, have had to pinch pennies throughout the rally. (For further reading, see Getting A Grip On The Cost Of Gas.) As a net oil exporter, Canada has benefited the most from the rally in oil, while Japan - a major net oil importer - has suffered the most.
Over the past three years (2003-2005), the correlation between the Canadian dollar and oil prices has been approximately 80%. Canada is the ninth largest producer of crude oil in the world, and it continues to climb up the list, with production in oil sands increasing regularly. In 2000, Canada surpassed Saudi Arabia as the United States' most significant oil supplier. Unbeknownst to many, the size of Canada's oil reserves is second only to those in Saudi Arabia. The geographical proximity between the U.S. and Canada, as well as the growing political uncertainty in the Middle East and South America, makes Canada one of the more desirable places from which the U.S. can import oil. But Canada does not service only U.S. demand. The country's vast oil resources are beginning to get a lot of attention from China, especially since Canada has recently stumbled upon a new stash of oil after a reclassification of its Alberta oil sands to the "economically recoverable" category. This makes the Canadian dollar one of the currencies best positioned to benefit from an ongoing surge in oil prices.