 |
LOGIN TO THE JAMAICAFX.COM TRADING ROOM |
|
Authorized Introducing Broker For FXCM LLC Open A Practice Account | Open A Live Account |
How Gold And Copper Affect The Forex Market
How Gold And Copper Affect The Forex Market:In addition to oil, the price of gold tends to have a very strong correlation or relationship with such currencies as the CHF, and an opposite or reverse correlation to the USD. Until recently, the CHF was backed by gold, in the same way the USD was a few decades ago. Gold is considered a ‘safe haven’ for capital during times of political and/or economic unrest. As capital flows out of the USD, Gold tends to benefit, as capital is attracted to tangible assets such as precious metals, primarily gold, in times of uncertainty. On the other hand, during prosperous times, capital will leave the safety of gold, and move into more speculative financial instruments such as the equity markets. Notice on the following daily charts, how gold and the USD/CHF are an almost perfect mirror image of each other, reflecting the flow of capital out of USD and into Gold or out of Gold and into the USD. USD/CHF & EURIUSD: The price of gold also tends to have a double barrel effect on the USD/CHF. As the price of gold increases, the USD tends to decline in value while the CHF tends to benefit. Since both Gold and the CUF are considered very safe, conservative financial instruments, any movement in either one, tends to have a strong impact on the other. As the price of gold rises in value, capital tends to flow out of the USD, while the CHF tends to benefit. In addition, the EUR/IJSD air tends to have a strong correlation to the price of gold, and a reverse relationship to the USD/CHF. Although the EUR currency itself is not back by gold, it is often times considered to have a strong correlation with this precious commodity. In fact the EUR (EURJI.JSD) has been considered the “anti-dollar” due to the fact that as capital flows out of the USD, investors are constantly looking for a relatively safe financial instrument, at least for the short term. It is important to look at the reasons ‘why’ the US dollar may lose value. This could occur due to a high difference in interest rates such as the GBP/USD or AUD/USD. But more importantly, the USD tends to lose value during times of economic and/or political instability inside the US. When this occurs, capital tends to search for financial instruments that generally benefit as an “alternative investment” to the USD. If the US economy is put under strain, perhaps the EUR economy will be the recipient of capital as investors look for a more favorable ‘risk to reward’ investment. Australia is the world’s second largest producer of this precious metal, mining nearly 261 tons annually, trailing only South Africa’s output of 345 tons. More than half of Australia’s exports are metals creating a high correlation between metals and the Australian dollar. Gold and copper particularly have a large effect. The price of copper plays a very large role in not only in the Australian economy, but also in many different sectors. For example, the housing (homebuilder) sector uses a great deal of copper for plumbing and other fixtures.The Australian economy has also benefited from their very strong housing market over the past few years. All of these elements are related in terms long-term economic cycles. With the US economy, and many other economies around the world falling under strain, the FOMC (US) and other central banks around the world lowered interest rates to encourage economic growth around the world. Lower interest rates made it easier for the average consumer to buy new homes or refinance existing properties. This alone has had a great benefit to the Australian dollar. However, due to poor returns in the equity markets such as the Dow Jones Industrial Average and NASDAQ, investors looked to other financial instruments and commodities such as gold, silver, and copper to hedge their equity portfolios. So one could say that low interest rates stimulated the housing market, which in turn drove up the demand for those products and components that are used in the manufacturing of homes; i.e. copper. Traders tracking the AUD should also note the price action of copper as well as the fundamental reports released from Australia that relate to their housing markets. As copper, gold, and the Australian housing market soured, the Reserve Bank of Australia raised interest rates to combat the risk of inflation. As AUD interest rates climb quickly, capital from around the world looked to the AUD as it paid a significantly higher yield than other majors such as the USD, CHF, CAD, and WY. In fact one of the only currencies that currently have a higher interest rate is the NZD, which benefits for some of the same reasons and macro economic forces. Buying a currency with a higher interest rate, and selling another with a lower interest rate is known as a ‘Ca trade’. Looking down the road, those interested in the carry trade or not only study the current interest rates but as well the ‘anticipation’ of future interest rates. The FX market moves in anticipation of higher or lower interest rates based on what information we have at the present time. The FX market, like any market is a “forward looking mechanism”. Therefore, if an Australian economic number is released that indicates that the housing market and/or AUD economy is slowing, or at least, has failed to sustain previous growth, traders may anticipate the Reserve Bank of Australia to cease raising interest rates, and perhaps consider cutting them down the road. In other words, simply buying the AUD/USD (positive carry trade) is not sufficient in order to be a profitable trader. We must not only study interest rates, and the charts, but as well the market’s anticipation for future price action and the future outlook of the economies around the world.
|
||||||||||||||||||||||
| Worldwide Realtors Company Limited © 2001-2009 | All Rights Reserved |