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Commodities: Major role in the FX arena - FXStreet

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Apr 6, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    Ross Burland, Editor and Analyst at FXStreet.com, explains the major role of commodities in the FX space.

    Key Quotes

    “Professional forex traders have long known that trading currencies requires looking beyond the world of FX and commodity prices remain one of the main drivers in the FX space for this year. While exports and economic growth are directly correlated to a country's domestic industry, it is natural for some currencies to be heavily correlated with commodity prices.

    The American, Australian, Canadian, New Zealand dollar, Swiss Franc and Yen are the most popular correlations. In the FX space, oil, gold and dairy are the current focus among traders and have been offering plenty of volatility in recent years and driving subsequent price impacts on the respective currency. US oil, for example, surged from $60 a barrel in 2006 to a high of $147.27 a barrel in 2008 before plummeting back below $40 a barrel in the first quarter of 2009 and rising to $116 in 2011.

    Then, in 2014, the glut kicked in and we have seen a steady decline in the price of oil to a low a level as $26.03 for this year so far, reflecting weaker growth prospects in emerging economies, abundant supplies and a strong U.S. dollar. Moreover, this decline can be said of all the main industrial commodity price indices (two-thirds for energy and more than one-half for metals) in the last quarter of 2015.

    Heightened concerns

    There are heightened concerns about slowing growth in emerging economies, mild winter weather in the northern hemisphere, elevated stocks, resilient U.S. oil production, earlier-than-expected Iranian exports, and unchanged OPEC policy prioritizing market share that are all contributing to the negative outlook for the sector in 2016 relative to last year, 2015. So what does this all mean for FX; the only way is down?

    Well, while prices are correlated to the performances in the commodity indices, and following the trend, you can place your bets on more downside for this year in the commodity related bloc of currencies. However, taking oil aside for a moment, from the current lows, a gradual recovery might be expected over the course of the year for a number of reasons.

    Will oil recover?

    First, a rebound in prices might be expected considering the sharp declines we have seen already in the first quarter of 2016. It is difficult to fully justify the price action when looking at the fundamental drivers of oil's demand and supply. Secondly, when prices get this low, it is the higher-cost oil producers that suffer the most and the market is keeping a close ear to the ground for any signs of production cuts that will effectively offset, to some extent, the over capacity flood in the market. Third, demand always comes back naturally and if a modest pickup in global growth is expected then that will balance supply and demand.”
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