Intermarket correlations can play a major role in financial market price fluctuations. This can readily be seen in the foreign exchange (or “forex”) market, especially with respect to what are termed “commodity currencies.” These are currencies that have historically shown to be correlated, or closely tied, to the prices of certain commodities, especially such commodities as crude oil and gold.

The two major commodity currencies that are available for trading in the forex market are the Canadian dollar and the Australian dollar. These two global currencies exhibit correlations with the crude oil market and the gold market, respectively, as shown on the following charts.


Figure 1: Crude Oil and USD/CAD (Source: FX Solutions AccuCharts retrieved on 9/25/12)

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The positive correlation between the Canadian dollar and crude oil is well-documented. This correlation can be seen in Figure 1, which shows a daily chart of oil overlaid on top of a daily chart of the USD/CAD (U.S. dollar against Canadian dollar) exchange rate. It is important to note that since currencies are effectively traded in pairs, and never in isolation, the Canadian dollar has to be paired with another currency (in this case, the U.S. dollar) in order to generate an exchange rate. Furthermore, it is also important to note that if USD/CAD is going up, for example, it means that the U.S. dollar is gaining value against the Canadian dollar which, in turn, is losing value against the U.S. dollar. Likewise, if USD/CAD is going down, it means that the U.S. dollar is losing value against the Canadian dollar which, in turn, is gaining value against the U.S. dollar.

As indicated on the chart, when the general trend direction of oil is up, USD/CAD tends to move generally to the downside. And when the general trend direction of oil is down, USD/CAD tends to move generally to the upside. This displays an inverse correlation between oil and USD/CAD. But because of the pairing nature of currency exchange rates, it is actually a positive correlation between oil and the Canadian dollar currency.

Why does this positive correlation exist? Canada is the world’s 6th largest crude oil producer, the 5th largest energy producer, and is ranked 3rd in the world in crude oil reserves, after Saudi Arabia and Venezuela[1]. Clearly, from a fundamental perspective, Canada’s economy and currency are prone to be impacted heavily by the ups and downs in the price of crude oil. Therefore, when there are events or spikes that impact the price of oil, whether to the upside or to the downside, the price of the Canadian dollar against other world currencies may be impacted in the same general direction.


Figure 2: Gold and AUD/USD (Source: FX Solutions AccuCharts retrieved on 9/25/12)

A similarly positive correlation often exists between the price of gold and the AUD/USD (Australian dollar against the U.S. dollar) exchange rate. As seen in Figure 2, which shows a short-term 30-minute chart of gold overlaid on top of a 30-minute chart of AUD/USD, when the general trend direction of gold is up, AUD/USD (or just the Australian dollar currency) tends to move generally to the upside. Likewise, when the general trend direction of gold is down, the Australian dollar currency tends to move generally to the downside. This displays a positive correlation between the Australian dollar and gold.

According to the Australian government[2], the country is the world’s second largest producer of gold after China, and its gold exports total around A$14 billion per year. It is therefore clear that Australia’s economy and currency are very likely to be impacted heavily by the ups and downs in the price of gold. Furthermore, when there are events or spikes that impact the price of gold, whether to the upside or to the downside, the price of the Australian dollar against other world currencies may be impacted in the same general direction.

Traders in the foreign exchange markets should be well aware of the impact that intermarket correlations can have on currencies. When prices of commodities move significantly, for whatever reason, exchange rates on commodity currencies can move in a correlated manner.

Forex trading involves substantial risk of loss and is not suitable for all investors.

This information is being provided only for general market commentary (generally based on technical analysis) and does not constitute investment trading advice. These materials represent the views and opinions of the author. Certain information contained herein has been obtained from sources that FX Solutions LLC ("FXS") believes to be reliable; however, FXS cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is subject to change without notice. FXS has no obligation to update any or all of such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy or accept responsibility for errors. These materials are not intended as an offer or solicitation with respect to the purchase or sale of any financial instrument and should not be used as the basis for any investment decision. Past performance is not necessarily indicative of future results. No determination has been made regarding the appropriateness of any information contained herein. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated herein. Before you decide to trade forex, carefully consider your investment objectives, experience level, and risk tolerance. FXS expressly disclaims any loss or profits (whether direct, indirect, or consequential) that may arise from any use of the information contained in or derived from this document. FXS and its affiliates may engage in transactions that are inconsistent with the views expressed herein.  FXS does not offer products relating to gold or oil.  FXS is independent of any publisher of this article and does not endorse, sponsor or accept any liability of any materials outside of websites belonging to FXS.




[1] Canadian Association of Petroleum Producers. “Basic Statistics.” Copyright 2012. http://www.capp.ca/library/statistics/basic/Pages/default.aspx . Accessed on 9/27/12.

[2] Geosciences Australia. “Gold.” July 31, 2012.  http://www.ga.gov.au/minerals/mineral-resources/gold.html . Accessed on 9/27/12.

Forex trading involves a substantial risk of loss and is not suitable for all investors.  FX Solutions LLC (“FXS”) is compensated through a portion of the bid/ask spread. This information is being provided only for general market commentary (based on technical analysis) and does not constitute investment trading advice.  Certain information contained herein has been obtained from sources that FXS believes to be reliable; however, FXS cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is subject to change without notice. FXS has no obligation to update any or all of such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy or accept responsibility for errors. These materials are not intended as an offer or solicitation with respect to the purchase or sale of any financial instrument and should not be used as the basis for any investment decision. Past performance is not necessarily indicative of future results. No determination has been made regarding the appropriateness of any information contained herein. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated herein. FXS expressly disclaims any loss or profits that may arise from any use of the information contained in or derived from this commentary. FXS and its affiliates may engage in transactions that are inconsistent with the views expressed herein.  FXS does not endorse nor is it responsible for any third-party posts related to this material.

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