As commodities in financial market has the same role as stock and currency, the ups and downs of commodity prices could significantly affect forex market.
Nowadays, commodities like agricultural products and minerals are also being traded in financial market. Like in stock market, they too could be traded in spot, forward, futures, and various derivatives. As commodities in financial market has the same role as stock and currency, the ups and downs of commodity prices could significantly affect forex market. Some commodities, such as Crude Oil and Gold are well-known as strong influences toward USD and other currencies.
Crude Oil
Crude Oil is still one of the world's vital necessities today, despite of the advances on renewable energy researches. It is mostly mined through oil drilling. It is then processed into various kinds of fuel, like gasoline, kerosene, etc, and plastics and pharmaceuticals. Like its fellow commodities, Crude Oil prices are determined by its supply and demand; or more specifically, the factors that influence the availability of it. Some of the most important are OPEC and natural disasters.
Some of the World's major producers of crude oil banded together in 1960 within OPEC (Organization of the Petroleum Exporting Countries). It is an intergovernmental oil cartel that currently consists of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela. Their decisions, be it a political one (such as embargo), or in relation with oil production itself (production quotas and prices), have a definite influence on Crude Oil. War in and around these countries that was seen as endangering oil production, will drive up oil prices.
Oil price, in turn, could influence currencies. International Energy Agency mentioned that high oil prices generally have a large negative impact on the global economic growth. Countries with high consumption of oil will suffer from the high price, and in the long term, the burden will take shape in negative trade balance. That's why, a higher oil price will weaken USD, as the US is a major consumer of oil. On the other hand, countries that exports oil like Canada and Norwegia will experience surges in its exchange rate.
In addition, crude oil is one of the most traded commodity trading instruments around the world. Interested in becoming an oil trader? Start right now! Watch the video below for useful tips in oil trading.
Gold
As investment, gold has unique characteristics. It's long-term profit prospect has turn it into one of few safe haven in financial market. This is how it influences currency. At good times, or when the world's economic prospect is good, investors will lose their gold and seek to invest in stocks and currencies. Conversely, erratic stock and currency market will drive investors to seek safety in gold, and make gold price climb higher.
Investors are also using gold as hedge against inflation, as it is the perfect anti-inflation instrument. Therefore, at high inflation period, investors will seek gold and drive the price higher.Another party that may buy gold is central banks. Central Banks' buying of gold will affect the amount of money in circulation, as they print more money in order to buy gold. The result is rising supply of a certain currency, which may push up inflation, and in turn, influence the currency's exchange rate.
Stock Market
Theoretically, stock market has no direct influence on forex market. However, sometimes there are peculiarities in the movement of both markets, that analysts often found that certain stock market movements may give us clues into the potentials of certain currencies.
Jeremy Wagner of DailyFX noted that if the stock market moves upward, then AUD/USD, NZD/USD, and EUR/JPY tend to go up too. On the other hand, USD/CAD, EUR/AUD, and GBP/AUD tend to move downward. These are related to the risk carried by each currency pair.
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Sean Hyman of Newsmax also described similar phenomenon by observing year to year trends. As stocks boom from October to around May, He said, risk-on currencies like AUD, NZD, and CAD tend to perform the best. While when stock market is in low from May through October, currencies like USD and JPY will perform better.
