The Relationship Between Commodity Prices and Currency Performance

When gold prices hit a record high, you can guarantee a forex trader is watching the Australian dollar climb with a gigantic smile across their face. In October 2024, the value of gold surpassed $2,700 an ounce for the first time in history. At the same time, the Australian dollar was one of the strongest-performing currencies on the forex market. It’s not a coincidence. A nation that is known for its ties to a commodity will always have its currency reflect the strength or weakness of that commodity. 

This article will detail which currencies depend heavily on the value of a commodity, and give a few examples of how this relationship works.

What are commodity currencies?

Countries that export raw materials see their currency values inextricably linked to the price of those commodities. For Australia, that is gold and iron ore. For Canada, it’s oil. New Zealand has dairy and agricultural products.

The link exists because export revenue, trade balances, and investor confidence all rely on the performance and value of the commodities, which are in turn reflected in currency strength. 

When a country’s primary export is a commodity, the price of that commodity determines how many dollars flow into the national economy. When the price of gold doubles, and Australia relies on selling gold, the country earns significantly more for the same export volume. When more foreign currency flows into the country, there is more demand for Australian dollars (AUD) to convert it. This increased demand pushes up the value of the money. 

The difference between what a country earns from its exports and the cost of what it imports is its trade balance. When a commodity’s price rises, it can alter the trade balance of a resource-rich country and push it from a deficit to a surplus. A surplus in the trade balance signals to the market’s economic growth, attracting foreign investment and increased demand for that country’s currency. 

Markets always interpret the rise in the price of a commodity as good news for the economies that export it. The perception of that country having stronger growth prospects and revenues, as well as stable debt management, brings more foreign investors to buy local currency in order to invest, multiplying the revenue effect and strengthening the currency.

Gold: the gateway commodity

Australia is one of the largest global producers of gold. When gold prices rise, the demand for AUD rises with it. Gold is priced in US dollars (USD), so a weaker dollar will push the gold price higher, and vice versa.

Unlike oil or dairy, gold is almost universally understood and requires no specialist knowledge to contextualise it as valuable. If you can understand how the link works here with gold and the Australian dollar, you can then begin to understand how other, more complex commodities act with their relative currencies.

In the forex market, the correlation between gold and AUD is one of the most historically stable and well-documented. For new traders who are learning how to identify patterns, starting with this one can give you a simple system to observe, trust, and buy into.

The fact that gold has two currency touchpoints simultaneously helps hammer home the educational benefits of starting with gold as your currency-commodity: being able to monitor its positive correlation with AUD alongside the negative relationship with USD gives you two lessons for the price of one, literally.

Oil and the Canadian dollar

Some correlations aren’t guaranteed. That’s why starting with AUD/gold is a useful education. Canadian dollars and oil have a much more complex relationship. When oil prices rise, Canada’s export strength revenues improve, CAD strengthens, and USD/CAD falls.

Over the last decade, this particular correlation has weakened. Supply-driven oil price moves CAD differently from demand-driven prices. For example, if OPEC (Organisation of the Petroleum Exporting Countries: Saudi Arabia, Iraq and the UAE are just three of these big players) was to cut production, the global oil supply drops and prices rise. Just because the oil price rose, it doesn’t necessarily mean that there is global economic growth. A demand-driven rise signifies that the world economy is consuming more oil, a genuinely good outlook for Canadian trade. In this case, CAD responds stronger because investor outlook follows real economic activity and not supply constraints. 

Correlations always require context, not just observation. Ask yourself why oil is moving before assuming that CAD will follow it. This is what makes an informed trader, rather than a reactive trader. Monitor OPEC meeting dates, US energy inventory reports and Canada’s trade balance data. These three triggers will signify whether oil movement carries CAD with it or not. 

Choose a broker platform that has both commodity and forex data

These two examples should give you the tools to begin watching commodity price movements before thinking about making your first trade. Using the economic calendar on your chosen forex platform, track any events that move commodity prices and check how the market reacts to each one. 

This is where choosing a broker platform that can give you access to both commodity and forex data in one place is essential for a new trader who wants to understand the relationship between the two factors. Finding the best forex brokers that offer integrated commodity tracking can make this a lot easier. The skill in understanding the correlation between currency and commodity is learnable and accessible by using the right tools. 

Once you have watched for long enough, built a two-step check into a routine before you place your first trade on a commodity-linked forex pair: on AUD/USD, check where gold is trading and if it has moved significantly in the last 24 hours; on CAD/USD, check the oil price for the same reason. Then, ask if that move is significant enough for you to act on. 0.5% is nothing, but 3% is worth investigating. Check the commodity and qualify the move. It takes two minutes but can buy you invaluable progress against other traders operating the same strategy.

Understanding the relationship is a powerful tool

To be that forex trader who sits smiling when the price of gold hits a record high, you have to have learned how the relationship between commodity and currency works intimately. The price of a commodity doesn’t move markets on its own, but what it does do instead is send signals that forex traders can learn to read. 

This skill, once learned, can be very powerful in being able to operate a succinct and successful trading strategy, because instead of reacting to the market, you can be the one at the forefront. Informed traders always come out on top ahead of the market, because you moved before the money shifted significantly.