Using Commodities As Forex Indicators

The art of trading is all about predicting the next move in the market. This isn’t easy and putting this basic concept into action requires a lot of skill and experience especially 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.

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.

Let's head back to 2005, where oil and gold were 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 rises or falls.

Now let's take a 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 Japan is a an oil importing country, importing close to 99% of its oil. Because Japan also lacks other natural resources to compensate for this energy problem, the Japanese economy is particularly vulnerable to the oil price. Therefore stable and low oil prices are of utmost importance for the Japanese economy, so when the oil prices rise it hurts the Japanese Yen.

Now 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.

Open the door to successful trading
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