Many day-traders pay attention to short-term economic indicators that may affect their trading. But, it is also essential to consider macroeconomic events which may move the market. The large scale macro events may potentially influence mid-to-long-term fundamentals for the currencies of the countries.
Events such as wars, political uncertainties, natural disasters, and critical international conferences are unpredictable and irregular, which leads to a ripple effect on the currency market. Depending on these events, the currency may be rapidly strengthening or weakening rapidly.
Therefore, we should pay attention to significant issues around the world. By understanding the market atmosphere before and after the event occurs, we can do successful trading. We can reduce at least the likelihood of severe losses.
What Are The Significant Events?
– G7 Finance Ministers Meeting
– Presidential Election
– Major Central Bank Meetings.
– Possibility of Change in the Monetary System.
– Possibility of Default in Large Countries.
– Possibility of War Development Due to Geopolitical Tensions.
– Fed’s Semi-Annual Speech to Congress.
Before analysing the relationship between gold and commodity currency, it is vital to understand the relationship between the U.S. dollar and gold in advance. The U.S. is the world’s second-largest gold producer after South Africa, but a rally in gold prices does not lead to a rally in the dollar. When the dollar fell, gold prices often rose, and vice versa. In times of geopolitical instability, investors avoid the dollar and instead choose gold as a safe asset.
Many investors often call gold anti-dollars. Thus, if the dollar weakens, gold prices will gain momentum as many timid investors flock to stable commodities to avoid the depreciating dollar. AUD/USD, NZD/USD, and USD/CHF tend to chase gold price movements like mirrors. This is because each of these currencies has a close relationship with gold naturally and politically.
Commodities such as gold and crude oil are very closely linked to the FX market. Therefore, understanding the nature of the relationship between commodities and currencies would help traders measure risks, predict price changes, and understand the extent of risk exposure.
For investors, commodities may be seen as a completely different concept. Still, in particular, gold and crude oil tend to fluctuate depending on similar fundamentals that drive the FX market. Four currencies are considered commodity currencies: Australian dollars, Canadian dollars, New Zealand dollars, and Swiss francs.
All four currencies are strongly correlated with gold prices. Gold deposits and currency-related laws in these countries affect gold prices, and the money was moving almost like a mirror. The Canadian dollar fluctuates in conjunction with crude oil prices, but their relationship is very complicated. These currencies have a striking correlation with the commodities, and the money movement naturally affects the price of the product. If we grasp this movement and direction, we can quickly identify trends between the two markets.
2. Oil Price
Oil prices have a significant impact on the global economy. Regardless of whether the economic entity is a producer or a consumer, it is affected. Therefore, the correlation between oil prices and currencies is more complex and unstable than gold. The Canadian dollar is the only commodity currency that has a close relationship with crude oil prices.
Because USD/CAD correlates with -0.4, USD/CAD falls when oil prices rally, which means that the Canadian dollar has a bullish trend. Although Canada has the world’s 14th largest crude oil reserves, oil prices are far greater than gold and significantly impact Canada’s economy.
Gold prices do not have a ripple effect on other parts, but oil prices do. Canada has a massive demand for heating oil throughout the year due to the cold weather. Canada’s economy is susceptible when its overseas economic structure is weak because it depends entirely on exports.
Therefore, oil prices have a wide variety of influences on the Canadian dollar. Much of this impact is attributed to changes in U.S. consumer demand due to rising oil prices. Usually, Canada concern about U.S. consumer’s demand when the oil price increases. This is because 85% of Canadian exports are headed to the U.S., closely linked to the Canadian economy.
3. Bond Spreads
Interest rates are an essential part of investment decisions and determine the market’s direction. The FOMC rate decision is the second most influential employment data indicator that drives the foreign exchange market.
Changes in interest rates determine their long-term direction in currency value. A country’s central bank’s interest rate decision could affect several currencies as currency pairs are closely linked to each other in the FX market. Interest rate differences in bonds such as LIBOR and 10-year fixed-rate bonds can be used as a leading indicator of exchange rate fluctuations.
4. Interest Rates
The central bank’s decision on overnight interest rates significantly impact exchange rate fluctuations since overseas investors are very sensitive to interest rates. Large investment banks, hedge funds, and institutional investors participate in the global market for asset management. Therefore, they are actively converting funds from low-interest assets to high-interest assets.
In theory, there is an absolute correlation between interest rate differences and exchange rate flows because most foreign exchange traders consider current and future interest rate differences when making investment decisions.
After referring to various data, we can see that the interest rate spread acts as a leading indicator. If market participants think they are trading on different information rather than just one interest rate variable, it may not be an accurate indicator.