Predicting the next move in the markets is the key to making money in trading, but putting this simple concept into action is much harder than it sounds. Professional forex traders have long known that trading currencies requires looking beyond the world of FX. The fact is that currencies are moved by many factors - supply and demand, politics, interest rates, economic growth, and so on. More specifically, since economic growth and exports are directly related to a country's domestic industry, it is natural for some currencies to be heavily correlated with commodity prices.  Other currencies that are also impacted by commodity prices but have a weaker correlation are the Swiss franc and the Japanese yen. Knowing which currency is correlated with what commodity can help traders understand and predict certain market movements. Here we look at currencies correlated with oil and gold and show you how you can use this information in your trading.

The three forex pairs which include currencies from countries that possess large amounts of commodities. The commodity pairs are: USD/CAD, USD/AUD, USD/NZD. These pairs are highly correlated to changes in commodity prices, therefore traders looking to gain exposure to commodity fluctuations often take advantage of these pairs.

Although there are many countries with large natural resource and commodity reserves, such as Russia, Saudi Arabia and Venezuela, the commodities of many of these nations are usually highly regulated by their domestic governments or thinly traded. The Canadian, Australian and New Zealand dollars are traded at high volumes and are therefore very liquid in the forex market.

Commodity Pairs Analysis

AUD/USD ( Australian dollar / U.S. dollar )

Because Australia is the world's third largest exporter of gold, the Australian dollar has an 80% positive correlation with this metal. If you believe the price of gold will continue to increase, you could favor a commodity-based economy like Australia because if gold rises, the Australian Dollar is very likely to follow it's lead.

1) If you think Gold will keep rising, it might be a good strategy to buy the Australian dollar because it's 80% positive correlation to Gold.

2) Since the AUD/USD pair tends to be highly correlated to gold, it might be a good idea to compare both AUD/USD and gold charts in order to predict future moves.

NZD/USD (New Zealand dollar / U.S. dollar)

The health of New Zealand's economy is closely tied to the health of the Australian economy. This explains why the New Zealand dollar and the Australian dollar have had a 92% positive correlation over the past four years (2003-2006). The New Zealand dollar has an even stronger correlation with gold than the AUD/USD does - the correlation has been approximately 88% over the past three years. If you believe the price of gold will continue to increase, you could favor a commodity-based economy like New Zealand because if gold rises, the New Zealand dollar is overly likely to follow it's lead.

Trading Ideas

1) If you think gold will keep rising, it might be a good strategy to buy the New Zealand dollar because it's 85% positive correlation to gold over the past years.

2) Since the NZD/USD pair tends to be highly correlated to gold (together with the AUD/USD), it might be a good idea to compare both NZD/USD and gold charts in order to predict future moves in the New Zealand dollar.

 USD/CAD (U.S. dollar / Canadian dollar)

The USD/CAD is the single biggest beneficiary of rising oil prices. Canada which is already the biggest exporter of oil to the US, will experience a boost to its economy when oil price continue to increase. Therefore, if oil rises the Canadian dollar is likely to follow. Over the past years , the correlation between the Canadian dollar and oil prices has been approximately 81%.

Trading Ideas

1) If you believe the price of oil will keep rising, it might be a good strategy to buy the Canadian dollar because it's 81% positive correlation to oil over the past years.

2) Since the USD/CAD pair tends to be highly correlated to oil, it might be a good idea to compare both Canadian dollar and oil charts in order to predict future moves.