Predicting the next moves in the market is what the art of trading is all about. Of course this isn’t easy and putting this basic concept into action requires a lot of skill and experience. This is especially true in the forex market. Investors and traders have long known that the forex market is influenced by far more than just forex. The truth is, currency is influenced by many factors, political, economic, interest rates, economic growth and much more, and all are interlinked to some extent making it that much harder to isolate one moving factor.
Specifically some currencies are strongly linked to other factors, such as for example commodities. In this article we will show some examples on how you can trade currency based on movements in the commodity market and how you analyze those numbers.
Lets go back to the year 2005, where oil and gold unlike now where at all time record highs. Those two commodities were the big movers in the markets that year. The dollar had very different reactions to other currencies based on those commodity movements and how the foreign currency related to oil and gold. The way a trader can take advantage of this is to figure out how a currency will react when the oil price rices or falls. In the next example we will look at the CAD (Canadian Dollar) and its reaction to the oil price.
In 2005 the Canadian Dollar was very strong. This was a direct result of the high oil prices, rising more than 60% over the year. Because Canada is a net exporter of oil, the extra revenue of oil income greatly improved the CAD as the overall Canadian economy benefited.
On the other hand the other example here is Japan.
Japan is a an oil importing country, importing close to 99% of its oil, virtually all. Because Japan also lacks other natural resources to compensate for this energy problem, the Japanese economy is particularly vulnerable to the oil price. In fact the Japanese imports more than 79% of its total energy need. So stable and low oil prices are of utmost importance for the Japanese economy. So when the oil prices rise it hurts the Japanese Yen.
When we know these two things, how can we capitalize on this knowledge?
We can now accept these to currencies or rather their currency pair CAD/JPY as a prime indicator on oil prices. So, we can trade this currency pair for profits on nothing else but oil information. Or the CAD/JPY can give us additional information on the market sentiment on oil.
Gold is another currency that tends to be linked to especially the dollar. When the dollar weakens, and thus the markets belief in the monetary system, gold rises in value. While gold is no longer the reserve value of the world, it is still a leading storage of value and will likely continue to be so.