Commodity & Currency Relationships: Forget About It
They’re are a multiple of reasons why most retail account holders consistently lose significant amounts of money in attempting to trade. One of them is the widespread believe by clients and retail forex analysts that relationships between stock indices, commodities and currencies can aid them in thier trading. After starting my career on the grain floor of the old CBoT in 1980, I can tell you this: if there is one thing trickier to trade than currencies it’s commodities. So to consider a trade in currencies based on price behavior of a commodity is pretty much akin to betting on a horse race after looking at baseball statistics…in my humble opinion.
Below are three charts. CAD on top, crude oil in the middle, and Swissy on the bottom. When you look at price action this year, we can see crude and CAD basically moving parallel to each other. Many analysts will tell you that this is bacause CAD is a “commodity currency”. There is no doubt that Canada arguably has the 2nd largest oil reserves in the world — Saudia Arabia is still #1. But we can also see that as these two markets were moving in the same direction, so was the Swissy.
I’ve never been one to spend too much time on the cause of price behavior believing a trader needs to focus on the affects of price movment. So I have no idea why the Looney would have topped out in 2007 nearly 8 months before crude did, with the Canadian currency going sideways at the same time crude leapt nearly 50%. Likewise not sure why the Swissy continued higher, eventually breaking it’s uptrend at the same approximate time crude did. I do know the Swiss don’t have much in the way of oil reserves to speak of.
Jay Norris
www.trading-u.com
DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and is not suitable for every investor. Risks include the potential that changing political/economic conditions may substantially affect the price/liquidity of a currency. Investors may lose all or more than their original investments.