Foreign exchange is the process of exchanging one currency with another. This is a common financial process that can be performed for commercial or trading purposes.Forex trading is the speculation on currency prices for potential profits. Since forex trading is primarily exchanging one currency for another, currencies in the forex market are traded in pairs. The currency pair is a quotation for one currency against the other; known as quote currency and base currency.

Currency pairs are affected by differentfundamentalandtechnicalfactors that affect the exchange rate. These factors include economic policies, political stability, trade flows, and of course the changes in supply and demand.The names of pairs use the abbreviation of currency and country names. For example, the USD/JPY currency pair refers to the US Dollar against the Japanese Yen.

The eight most traded currencies in the forex market are theUS dollar(USD), the euro (EUR), the British pound (GBP), the Japanese yen (JPY), the Canadian dollar (CAD), the Australian dollar (AUD), the Swiss franc (CHF), and the Chinese Yuan (CNY), according to theBIS surveyin 2019.

What is a Commodity Currency？

A commodity currency is a currency whose value is correlated to the global price of certain commodities. In forex trading, commodity pairs are the currency pairs that involve currencies from countries that heavily depend on commodity exports and reserves.

The top commodity currencies in forex trading are the Canadian Dollar, Australian Dollar, and New Zealand Dollar.

So, if you want to trade any commodity currency pair you should first have a look at the correlated commodity.

Gold and Forex Correlation

Changes in gold prices affect the so-called commodity currencies. The commodity currency is a currency that is highly correlated to the changes in the prices of some commodities.

Tradinggoldmeans you will have to monitor the movements of the US Dollar. For example, if the value of the US Dollar is increasing, that drives the price of the yellow metal lower.

An additional factor to consider when you step into the world of gold trading is market liquidity. It is being traded nearly 24 hours per day around the world. This implies higher liquidity around the clock although, as with the forex market, it can be relatively quiet after the US session closes, and lower volumes may lead to volatile price movements.

Currency and Commodity Correlations

USD and Gold Prices

TheUS Dollarand Gold prices are negatively correlated and dont get along very well. When the USD rises, gold prices fall. From a fundamental perspective, this relation can be justified by different stages of economic cycles and the risk appetite. Investors abandon the dollar and buy gold as a safe haven in times of economic uncertainty.

Despite being a commodity that is mainly controlled by forces of supply and demand, gold is affected by other fundamental factors including interest rate decisions, central bank reserves, and volatility.

The pricing of international gold prices in the US dollar also contributes to the negative correlation between both.

CAD and Oil Prices

The Canadian dollar is positively correlated to oil prices as Canada is the main oil exporter. The economy relies heavily on oil-exporting, making it more vulnerable to changes in supply and demand, prices and export levels.

If you are a forex trader, youd probably notice the strong relation between CAD and WTI prices. West Texas Intermediate or WTIis widely traded in North America, which makes it significantly influential to the Canadian economy. Canada's oil exports are mainly directed to its larger neighbors to the south. The value of the CAD is strictly tied to the price of the black gold.

The following chart shows the price correlation between the WTI prices and the USD/CAD. Since the CAD is the quote currency in this pair, the pair goes down when oil prices rise and vice versa.

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