Assessing the Correlation between Commodities and Currencies

Forex brokerages have gradually been expanding their product range over the last six years to cater to the growing demand for additional financial instruments. Commodities have been a driver of demand as traders look to benefit from the sharp price movements witnessed in the post-2008 trading landscape in instruments such as gold and oil. A new phenomena inciting trader interest is correlation trading between two or more instruments.

FX has been one of the fastest growing financial asset classes over the last decade. As investors and traders embrace the newly recognized instrument, forex is widely used for hedging purposes, however, the deep liquid nature of the asset class means that its average daily trading range is attractive for active traders. The same trend is being seen in commodity contracts such as the precious metals and energies contracts. FX and commodities have a direct and indirect relationship and traders and brokers who leverage this notion could tap into an untouched market.

Linking the Two

Staying ahead of the game could turn fruitful for both providers and traders as they look for alpha generating opportunities. The latest decline in global energy markets has put pressure on oil exporting countries such as Canada, similarly with Australia and New Zealand, which have also seen an effect on their currency. When the price of a commodity increases or decreases it either strengthens or weakens the home currency, as supply and demand play a role in the need to purchase or sell the commodity in that particular country’s currency.

The forex trading community, both the proprietary traders and the sell-side have started catering to the growing number of multi-asset traders. The historic downturn in market volatility in the currency markets has been an additional turning point in the uptake of diversification of providers and an investor’s portfolio.

The relationship between forex and commodities is an article in the latest quarterly industry report.  that provides participants the key news stories, information and updates that shape the financial derivatives and FX trading environment.