Commodity Prices And Currency Movements

Oil and the Canadian Dollar
Figure 1 shows the clearly positive relationship between oil and the Canadian loonie. In fact, it should come as no surprise that the price of oil actually acts as a leading indicator for the price action of the CAD/USD. Since the traded instrument is the inverse, or USD/CAD, it\'s important to note that based on the historical relationship, when oil prices go up, USD/CAD falls and when oil prices go down, USD/CAD rises.

Figure 1: A look at the correlation between the price of oil and the price action in the CAD/USD from January 2005 to March 2009

Source: FXCM

Oil and the Japanese EconomyAt the other end of the spectrum is Japan, which imports nearly all of its oil (compared to the U.S., which imports approximately 50%). As of 2011, it is the world\'s third-largest net oil importer behind the U.S. and China. Japan\'s lack of domestic sources of energy, and its need to import vast amounts of crude oil, natural gas and other energy resources, make it particularly sensitive to changes in oil prices. Japan also lacks the flexibility to switch to nuclear power because it is a huge net importer of uranium for its nuclear power plants. As of 2008, the country\'s dependence on imports for primary energy stood at more than 84%. Oil provided Japan with 49% of its total energy needs, coal with 20%, nuclear power 13%, natural gas 14%, hydroelectric power 3% and renewable sources a mere 1%. Therefore, when oil prices skyrocket, the Japanese economy suffers. (Hedge against rising energy prices and diversify your portfolio; read ETFs Provide Easy Access To Energy Commodities.)



An Attractive Oil Play: CAD/JPY Looking at this from a net oil exporter/importer perspective, the currency pair that tops the list of currencies to trade to express a view on oil prices is the Canadian dollar against the Japanese yen. Figure 2 illustrates the tight correlation between oil prices and CAD/JPY. More often than not, oil prices tend to be the leading indicator (as with USD/CAD) for CAD/JPY price action with a noticeable delay. As oil prices continued to fall during this period, CAD/JPY broke the 100 level to hit a low of 76.

Figure 2: A look at the correlation between the price of oil and the price action in the CAD/JPY from January 2005 to March 2009

Source: FXCM

Going for GoldGold traders may also be surprised to hear that trading the Australian dollar is just like trading gold in many ways. As the world\'s third-largest producer of gold, the Australian dollar had an 84% positive correlation with the precious metal between 1999 and 2008. Generally speaking, this means that when gold prices rise, the Australian dollar appreciates as well. The proximity of New Zealand to Australia makes Australia a preferred destination for exporting New Zealand goods. Therefore, the health of New Zealand\'s economy is closely tied to the health of the Australian economy, which explains why the NZD/USD and the AUD/USD have had a 96% positive correlation over the same time period. The correlation of the NZD/USD with gold is slightly less than that of the Australia dollar but is still strong at 78%.

Figure 3: A look at the correlation between the price of gold and the price action in the NZD/USD from January 2005 to March 2009

Source: FXCM

A weaker, but still important, correlation is that of gold prices and the Swiss franc. The country\'s political neutrality and the fact that its currency used to be backed by gold have made the franc the currency of choice in times of political uncertainty. From January 2006 until January 2009, USD/CHF and gold prices had a 77% positive correlation. However, the relationship broke down somewhat in September 2005 as the U.S. dollar decoupled from gold price movements.