Understanding commodity correlations

A Wealth of Knowledge

Yonela Ngulugulu 12 Sep 2017

Looking at how commodity prices such as Oil, Gold, Iron Ore and so forth and so forth affect currencies...


Australia is one of the biggest exporter's of Gold

Commodity correlations refer to those currencies which are very much influenced by commodities such as Gold, Oil and so forth and so forth. This correlation happens due to the countries in which they either are the biggest manufacturers or exporters of such a commodity. For instance South Africa may be the biggest exporter of Gold, however, USD/ZAR is not liquid as such. So traders may then turn to currencies of countries who in fact produce and export such a commodity.


AUSTRALIA

For instance instead of one trading USD/ZAR a majority of traders may consider trading AUD/USD as also it is yet another country that produces Gold and also considered to be a a well developed country. As such it then constitutes to a major currency pair.
Australia is one of the biggest exporter's of Gold
. For instance, a major pair is made up of well developed economies against one another. Whereas USD/ZAR is considered to be an exotic pair because it compares economies of a yet developing country with that of a well developed country. With such pairs, an issue of liquidity often arises as there are not many people who trade it. However, for a currency pair such as AUD/USD, this is a battle of well established economies, the pair is liquid around the clock as it is traded globally and moves, whereas with USD/ZAR the pair may start to be quiet after trading hours.

Furthermore, the value of Gold may appreciate, but not because the intrinsic value of Gold is actually appreciating, but simply because Gold is considered a "safe heaven" So investors will hedge the to minimize risk. Moreover, the price of Gold may appreciate and not because of the value itself appreciating but simply because the dollar as the currency may be weakening. This would then mean one needs more dollars to purchase/attain the same ounces of Gold. As such, Gold tends to have an inverse relationship with the Dollar. Sma e could be said for Oil, it tends to have an inverse correlation with the dollar whereby an increase in the price of Oil is bad for the Dollar, and a decrease is good.


NEW ZEALAND

New Zealand

AUD has somewhat a correlation to GOLD prices as one of the biggest exporters of GOLD, an appreciation in GOLD prices will influence the Australian economy in a positive light. This would mean that Australia will make more money for the same quantity of Gold it was exporting. This is interpreted as being good for the economy and will stimulate the economy. As such the value of the currency will also appreciate over time as well. The same could be said for New Zealand as well. On the picture below is one of the biggest Gold mines in New Zealand that which could been seen from an aerial view. New Zealand is Australia's biggest trading partner, as such, the australian dollar currency value fluctuations would seem to be also have an impact on the New Zealand dollar as well, as these are each other's biggest trading partners.

New Zealand


CANADA

Oil sands in Canada

Canada is considered to be one of the most oil producing countries. As such its economy is very much driven by oil prices. A surge in oil prices is then good for Canada as an Oil producing country but then this would be bad for U.S.A as an oil importing country. This would basically mean that U.S.A will have to pay more money to get the same quantity of oil it was importing before. One should take note that such commodities may have a somewhat impact on the dollar.

Oil Barrel

This is because all commodities are priced in dollars. Both Oil and Gold are priced in dollars. So if for instance a company in Asia wants to buy oil, first things first is to convert its currencies to dollars to basically purchase "X" barrels of oil. Same thing with Gold, if a company in Asia wants to buy certain ounces of Gold, they would have to convert their currency to Gold to make the actual transaction.

Oil manufacturing

Japan is a biggest importer of Oil, so surge in oil prices will then affect Japan's economy in a bad way as it is considered the biggest importer of Oil, followed by the U.S.A


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