spot commodity trading
Commodity prices can single-handedly determine the economic outlook for a number of nations. The currencies of these nations rise and fall because of commodity price moves.
Commodities are also a barometer of economic growth, trade and consumer demand. Understanding the close relationship between raw materials and forex is essential to successful foreign exchange trading.
Listening to what the commodity market has to say can give you trading ideas, warn of potential pitfalls and help you become a better trader.
Knowing the correlations between commodities and currencies can be helpful if you want to speculate on a commodity’s direction. Thinking about going long gold? Go long the Australian dollar instead. The leverage and liquidity in forex trading make currencies a great alternative to trading commodities
Let’s take a look at a few commodities and see how they interrelate with forex.
oil
A substantial part of all international trade is related to crude oil. It is easily the most produced and traded commodity.
Currency speculators are left out of many oil transactions because most of the world’s big oil exporting nations use the U.S. dollar or have currencies that are difficult to trade. One exception is the Canadian dollar. Canada has the world’s second-largest proven oil reserves, after Saudi Arabia and it has one of the most accessible and liquid currencies.
The Canadian dollar often gets support late in the month as the nation’s massive oil exports are settled. These flows begin around the 22nd of each month and continue until month’s end. The market may try to anticipate the orders but volatility in the oil market and hedging can lead to unexpected moves.
At times the Canadian dollar trades in near-perfect harmony with oil. The correlations between commodities and currencies are usually expressed as ratios. A 0.99 daily ratio is a virtually perfect correlation, meaning that on 99 of 100 days when oil traded higher, the Canadian dollar did as well.
Very few correlations reach 0.99. The Canadian dollar/oil correlation is usually around 0.80.
All commodity/currency correlations have an ebb and flow that changes over time. In some months, the Canadian dollar will be up or down together every day. At other times, the Canadian dollar market will be more focused on interest rates, global growth or Canadian economic data.
In general, a localized event – such as a hurricane or pipeline explosion – will not affect the currency market as much as the commodity market.
Instead of watching the front-month commodity future, many professional currency traders watch the third or fourth contract for a clear sense of a commodity’s underlying direction.
Another currency that responds to oil is the Norwegian krone – also known as the Nokkie because its symbol is NOK. Although it’s not as liquid as the Canadian dollar, it is still the tenth most traded currency in the foreign exchange market. Trading the Canadian dollar against the krone is a way to factor out oil and zero in on differences in economic fundamentals between Canada and Norway.
natural gas
When many currency traders think of the Canadian dollar, they think only of oil. In dollar terms, Canada exports 50% less natural gas than oil, meaning that it’s about half as important as oil but still capable of jarring the currency.
Natural gas prices are notoriously volatile. In percentage terms, its average daily move is about double that of oil. It also does not correlate particularly well with oil.
When trading the Canadian dollar and oil, be sure not to overlook natural gas.
gold
Gold and the currency market have been forever linked. Virtually every nation holds a portion of its reserves in gold and it is the ultimate hedge against inflation.
Australia is one of the world’s largest exporters of gold and the Australian dollar has a strong correlation with the precious metal. Gold also tends to correlate with the euro.
One tip with gold is to be wary of technicals. It has a long history of creating unmistakable technical patterns that fail to pan out.
copper and base metal
Nothing forecasts the direction of the worldwide economy better than copper and base metals. Renowned commodities trader Dennis Gartman is fond of saying that copper has a masters in economics and base metals has a PhD.
The direction of the worldwide economy is of paramount importance to currency traders. A slump in base metals will spill over into other commodities, stocks and can completely shift trading patterns.
Yen crosses are particularly sensitive to the global economy because of Japan’s role as a leading exporter and because of the carry trade. In particular, the AUD/JPY and NZD/JPY crosses will trade alongside copper and base metals.
The Baltic Dry Index is another excellent course of insight into the strength of the global economy. It’s a survey issued daily by the London-based Baltic Exchange and tracks international shipping prices of various cargoes. Shipping is an excellent indicator of future economic activity.
the u.s. dollar and commodities
It’s important to remember that virtually all commodities are priced in U.S. dollars. All other things being equal, a broad 1% decline in the value of the U.S. dollar will boost every commodity price by 1% and vice versa.
Because of this, the trend in the commodity market will usually be inverse to the trend in the U.S. dollar.
The Reuters/Jeffries CRB Index is the most closely-followed index of the broad commodity market. It’s a weighted average of 19 important and actively traded commodities. It’s a great way to see a snapshot of the commodity market that mitigates the volatility of individual commodities.
Commodity prices can single-handedly determine the economic outlook for a number of nations. The currencies of these nations rise and fall because of commodity price moves.
Commodities are also a barometer of economic growth, trade and consumer demand. Understanding the close relationship between raw materials and forex is essential to successful foreign exchange trading.
Listening to what the commodity market has to say can give you trading ideas, warn of potential pitfalls and help you become a better trader.
Knowing the correlations between commodities and currencies can be helpful if you want to speculate on a commodity’s direction. Thinking about going long gold? Go long the Australian dollar instead. The leverage and liquidity in forex trading make currencies a great alternative to trading commodities
Let’s take a look at a few commodities and see how they interrelate with forex.
oilA substantial part of all international trade is related to crude oil. It is easily the most produced and traded commodity.
Currency speculators are left out of many oil transactions because most of the world’s big oil exporting nations use the U.S. dollar or have currencies that are difficult to trade. One exception is the Canadian dollar. Canada has the world’s second-largest proven oil reserves, after Saudi Arabia and it has one of the most accessible and liquid currencies.
The Canadian dollar often gets support late in the month as the nation’s massive oil exports are settled. These flows begin around the 22nd of each month and continue until month’s end. The market may try to anticipate the orders but volatility in the oil market and hedging can lead to unexpected moves.
At times the Canadian dollar trades in near-perfect harmony with oil. The correlations between commodities and currencies are usually expressed as ratios. A 0.99 daily ratio is a virtually perfect correlation, meaning that on 99 of 100 days when oil traded higher, the Canadian dollar did as well.
Very few correlations reach 0.99. The Canadian dollar/oil correlation is usually around 0.80.
All commodity/currency correlations have an ebb and flow that changes over time. In some months, the Canadian dollar will be up or down together every day. At other times, the Canadian dollar market will be more focused on interest rates, global growth or Canadian economic data.
In general, a localized event – such as a hurricane or pipeline explosion – will not affect the currency market as much as the commodity market.
Instead of watching the front-month commodity future, many professional currency traders watch the third or fourth contract for a clear sense of a commodity’s underlying direction.
Another currency that responds to oil is the Norwegian krone – also known as the Nokkie because its symbol is NOK. Although it’s not as liquid as the Canadian dollar, it is still the tenth most traded currency in the foreign exchange market. Trading the Canadian dollar against the krone is a way to factor out oil and zero in on differences in economic fundamentals between Canada and Norway.
natural gasWhen many currency traders think of the Canadian dollar, they think only of oil. In dollar terms, Canada exports 50% less natural gas than oil, meaning that it’s about half as important as oil but still capable of jarring the currency.
Natural gas prices are notoriously volatile. In percentage terms, its average daily move is about double that of oil. It also does not correlate particularly well with oil.
When trading the Canadian dollar and oil, be sure not to overlook natural gas.
goldGold and the currency market have been forever linked. Virtually every nation holds a portion of its reserves in gold and it is the ultimate hedge against inflation.
Australia is one of the world’s largest exporters of gold and the Australian dollar has a strong correlation with the precious metal. Gold also tends to correlate with the euro.
One tip with gold is to be wary of technicals. It has a long history of creating unmistakable technical patterns that fail to pan out.
copper and base metalNothing forecasts the direction of the worldwide economy better than copper and base metals. Renowned commodities trader Dennis Gartman is fond of saying that copper has a masters in economics and base metals has a PhD.
The direction of the worldwide economy is of paramount importance to currency traders. A slump in base metals will spill over into other commodities, stocks and can completely shift trading patterns.
Yen crosses are particularly sensitive to the global economy because of Japan’s role as a leading exporter and because of the carry trade. In particular, the AUD/JPY and NZD/JPY crosses will trade alongside copper and base metals.
The Baltic Dry Index is another excellent course of insight into the strength of the global economy. It’s a survey issued daily by the London-based Baltic Exchange and tracks international shipping prices of various cargoes. Shipping is an excellent indicator of future economic activity.
the u.s. dollar and commoditiesIt’s important to remember that virtually all commodities are priced in U.S. dollars. All other things being equal, a broad 1% decline in the value of the U.S. dollar will boost every commodity price by 1% and vice versa.
Because of this, the trend in the commodity market will usually be inverse to the trend in the U.S. dollar.
The Reuters/Jeffries CRB Index is the most closely-followed index of the broad commodity market. It’s a weighted average of 19 important and actively traded commodities. It’s a great way to see a snapshot of the commodity market that mitigates the volatility of individual commodities.
Very useful for us.
ReplyDeleteThank you
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