How commodity prices affect exchange rates
When you think of Forex, think beyond currency pairs to commodities like oil, gold and coffee, which affect currency values. When you think of Forex, you probably don’t think of things like gold, oil and coffee. However, commodities are not just for futures traders and breakfast enthusiasts; they have a very close relationship with Forex markets, and commodity prices affect exchange rates in a way that may surprise you.
Commodities and currencies are like two drama queens at a high school reunion – they always influence each other. The value of a country’s currency is often linked to its main exports. When the price of these commodities fluctuates, so does the currency of these nations. Some examples include:
– Oil and USD-CAD: Canada, with its huge oil reserves, sees its currency (CAD) rise and fall with oil prices. When oil prices go up, the CAD tends to strengthen against the USD. If the oil price drops, the CAD usually takes a hit.
– Gold and AUD-USD: Australia is one of the world’s largest gold producers. The AUD often moves in tandem with gold prices. If gold prices skyrocket, the AUD will get a boost against the USD. Conversely, a fall in the gold price usually drags the AUD down.
– Silver and USD-MXN: Mexico is a significant silver exporter. The Mexican peso (MXN) often follows the silver market. Higher silver prices could lead to a stronger MXN against the USD, while lower prices could weaken it.
– Coffee and the BRL-USD: Brazil is the world’s largest coffee exporter. The Brazilian real (BRL) is correlated with coffee prices. A rise in coffee prices can strengthen the BRL against the USD, and a fall can weaken it.
– NZD-USD (Dairy): The Kiwi dollar is strongly affected by dairy prices. Keep an eye on Global Dairy Trade auctions.
Practical tips for traders
Commodities and Forex markets are like two sides of the same coin. By understanding their relationship, you can make more informed trading decisions and possibly avoid some nasty surprises. Here are some practical tips for traders:
1. Keep an eye on commodity news: Large commodity price movements often precede Forex pair movements.
2. understand economic dependencies: know which countries are highly dependent on specific commodities.
3. use correlation data: Historical data can help predict how currency pairs may move in response to commodity price changes.
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