Lesson 8 of 9 · 7 min
Commodities and currency correlations
Why the Canadian dollar follows oil, the Australian dollar follows iron ore, and what that means for the pairs you trade.
By the end you'll be able to
- Link the main commodity currencies to the commodities that drive them
- Explain why pairs correlate, using the shared-currency and shared-driver ideas
- Use correlations to confirm a view or to avoid doubling a bet
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Oil rises 5% overnight and the Canadian dollar is already stronger before any Canadian data is out. Currencies have neighbours, and knowing them explains a lot of otherwise mysterious moves.
Commodity currencies
A commodity currency belongs to a country that exports a lot of raw materials. When those prices rise, the country earns more, its trade balance improves, and its currency tends to follow:
| Currency | Follows | Why |
|---|---|---|
| CAD | Crude oil | Canada is a major oil exporter, mostly to the US |
| AUD | Iron ore, coal, gold | Australia’s largest exports, mostly to China |
| NZD | Dairy, agriculture | Plus a strong link to AUD and to Chinese demand |
| NOK | Oil and gas | Norway’s dominant export |
The reverse holds for importers. Japan imports nearly all its energy, so high oil prices tend to weigh on the yen.
Why pairs move together
Pairs correlate for two reasons. The first is a shared currency: EUR/USD and GBP/USD both have the dollar on the same side, so a dollar move drives both. The second is a shared driver: AUD/USD and NZD/USD both respond to Chinese demand and global risk mood, so they move together even beyond their shared dollar.
Correlations are not fixed. They weaken when one currency has its own story, such as a surprise rate decision, and they strengthen in panics when everything becomes a dollar trade.
Try it
Typical correlation between pairs
| EUR/USD | GBP/USD | AUD/USD | USD/JPY | USD/CHF | USD/CAD | |
|---|---|---|---|---|---|---|
| EUR/USD | ||||||
| GBP/USD | ||||||
| AUD/USD | ||||||
| USD/JPY | ||||||
| USD/CHF | ||||||
| USD/CAD |
Tap any cell to see what that correlation means for two open positions.
How many times are you really betting on the dollar?
Illustrative long-run tendencies. Tap a cell for what it means; tick positions to see your real dollar exposure.
In the grid, every pair in the top-left block is positive and every pair crossing into the USD-base block is negative, which is the shared-dollar effect.
Quick check
Question 1 of 3
Oil prices rise sharply. Which currency is most likely to strengthen?
Question 2 of 3
Why do EUR/USD and GBP/USD tend to move together?
Question 3 of 3
When do correlations between USD pairs usually strengthen?
Go deeper: AUD/USD Trading Guide: China, Commodities and the RBA · Commodity Currencies: How Oil and Metals Drive CAD and AUD · NZD/USD Trading Guide: Dairy, Rates and Risk Appetite · USD/CAD Trading Guide: Oil and the Bank of Canada