Forex correlations to gold and crude oil
The same economic events that move forex markets can have an impact on commodities like gold and crude oil as well. Learn which currency pairs are most correlated with other asset classes and why their movements could be linked.
Key points
- EUR, GBP and CHF are highly correlated with each other due to their geographic proximity and economic dependence
- Canadian dollar stands out as the most correlated currency to crude oil while British pound leads in correlation with gold
- Australian dollar has the highest correlation to stocks, both US and Chinese, among major currencies
Currency correlations
Among currency to currency correlations, EUR, GBP and CHF have the highest positive relationships. This can be explained by their geographic proximity within Europe, as well as close trading relationships and tourism. Forex correlations with the same base or quote currency will also share a strong correlation as both pairs are exposed to half of the same risks and movements, in theory.
Commodity correlations
Though often not as strong, forex pairs can be correlated to other asset classes like commodities. The Canadian dollar has the highest correlation with crude oil due to the significant proportion of Canada's GDP reliant on oil. While historically AUD has a strong relationship with gold, GBP currently has the highest correlation at 0.55.
Stock correlations
While stocks and currencies are not known to move in tandem with each other, Australian dollar has close to a +0.5 correlation with the S&P 500. The currency's correlation with FXI, Chinese large cap stocks, is even higher given their geographic proximity and AUD's liquidity compared to CNH.
How to trade correlations
- Open an account to get started, or practice on a demo account
- Choose your forex trading platform
- Open, monitor, and close positions on forex pairs
Trading forex markets using correlations requires an account with a forex provider like IG. Many traders watch major forex pairs like EUR/USD and USD/JPY for potential opportunities based on client sentiment. Contrarians might go against the prevailing sentiment in a forex pair, while trend followers might go with it.
You can help develop your forex trading strategies using resources like IG’s Trading Academy. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.
Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing.
This information has been prepared by IG, a trading name of IG US LLC. This material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. No representation or warranty is given as to the accuracy or completeness of the above information. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. See our Summary Conflicts Policy, available on our website.
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