How are foreign exchange rates affected by commodity price fluctuations?

By Chris Gallant AAA
A:

In the foreign exchange (forex) market, currency valuations move up and down as a result of many factors, including interest rates, supply and demand, economic growth and political conditions. Generally speaking, the more dependent a country is on a primary domestic industry, the stronger the correlation between the national currency and the industry's commodity prices.

In general, there is no uniform rule for determining what commodities a given currency will be correlated with and how strong that correlation will be. However, some currencies provide good examples of commodity-forex relationships.

Consider that the Canadian dollar is positively correlated to the price of oil. Therefore, as the price of oil goes up, the Canadian dollar tends to appreciate against other major currencies. This is due to the fact that Canada is a net oil exporter; when oil prices are high, Canada tends to reap greater revenues from its oil exports, giving the Canadian dollar a boost on the foreign exchange market.

Another good example comes from the Australian dollar, which is positively correlated with gold. Because Australia is one of the world's biggest gold producers, its dollar tends to move in unison with price changes in gold bullion. Thus, when gold prices rise significantly, the Australian dollar will also be expected to appreciate against other major currencies.

To learn more, check out Commodities: The Portfolio Hedge and Commodity Prices And Currency Movements.

RELATED FAQS

  1. What is the difference between a hedge fund and a private equity fund?

    Learn the primary differences between hedge funds and private equity funds, both of which are utilized by high net worth ...
  2. Where does a hedge fund get its money?

    Learn how a hedge fund is structured and how the managing partner of the fund goes about the process of finding and soliciting ...
  3. How do I use Commodity Channel Index (CCI) when creating a forex trading strategy?

    Learn that forex traders can use the Commodity Channel Index to create a forex trading strategy or as an additional indicator ...
  4. How do I sign up for a TreasuryDirect account?

    Invest in Treasury securities by dealing directly with the U.S. Department of the Treasury online, conveniently managing ...
RELATED TERMS
  1. Benchmark Crude Oil

    Benchmark crude oil is crude oil that serves as a pricing reference, ...
  2. Christmas tree (oil and gas)

    A vertical assembly of mechanical elements used in oil exploration ...
  3. FPSO (Floating Production Storage and Offloading)

    Acronym for Floating Production Storage and Offloading. FPSO ...
  4. Day rate (oil drilling)

    In oil production, a day rate is the amount a drilling contractor ...
  5. ICE LIBOR

    See LIBOR
  6. Houseable

    A piece of art that is able to fit inside a regular-sized living ...

You May Also Like

Related Articles
  1. Investing Basics

    The Most Popular Bitcoin Mining Software

  2. VelocityShares 3x Long Crude Oil ETN has the potential for huge returns, but there are several reasons why you might want to steer clear for now.
    Mutual Funds & ETFs

    A Leveraged Oil ETN For The Future (Just ...

  3. With stocks surging, financial advisers and their wealthy clients are asking why they should continue to bother with poorly performing alternatives.
    Professionals

    Are Advisors Off Alternatives?

  4. Investing Basics

    Putting Your Retirement Eggs in Several ...

  5. bitcoin
    Investing Basics

    Medici, The Blockchain Stock Exchange

Trading Center