Gold,oil and forex markets are intimately connected. As a forex trader, keeping an eye on the gold and oil markets can help you forecast price changes. Gold and oil prices are considered to be leading indicators in forex trading. The three markets, gold, oil and forex tend to move based on the same fundamentals.

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When USD rises, gold prices fall and when USD falls, gold prices rise. This is exactly what is happening right now. The currency pairs AUDUSD, NZDUSD and USDCHF tend to mirror gold prices. Now, USDCHF is a popular currency pair among forex traders. CHF is highly correlated with gold prices. This has something to do with the gold reserves held by the Swiss government. In times of financial crisis, investors tend to buy CHF. So, if you want to trade USDCHF, you should watch the gold market too!

CAD is the only currency pair in the commodity currencies that is somewhat correlated with oil prices. Oil drives the global economy. Rising oil prices produce inflation and slows down the global economy. Now, Canada is one of the biggest exporter of oil to US. Canadian economy is heavily dependent on heating oil as the winters are long and people use heating oil extensively during the winters.

Crude oil rices skyrocketed from around $60-70 per barrel to amost $150 per barrel in a matter of just few monts in the summer of 2008. No one is sure whether the increase in the prices was due to speculation by the hedge funds. When the stock markets crashed in the middle of 2008, most of the hedge funds had to liquidate their investments in crude oil futures to cover the redemption pressure on them. Prices collapsed and are down now due to low consumer demand because of the global recession. But it is being predicted by the experts that with a recovery in the global economy, the oil demand will rise and the prices will go up again. Oil demand in China and India plays a major role now.

As oil prices go up, consumers have to spend more on oil. The more they spend on oil, the less they spend on other products. The less they spend on other products, the less profit companies making these products make. Declining profits means declining stock prices.

Historically, rising prices of crude oil have been associated with falling stock markets. NYME is where most of the crude oil futures are traded. By monitoring the movement of the crude oil futures in NYME, you can develop a feel of the future economic situation of the United States. Since oil is heavily traded in US Dollar, this affects the US Dollar. The net effect is however a bit complicated.

Take Canada that has huge oil reserves after Saudi Arabia. The effect would be depreciation in the value of USD/CAD pair. US imports more oil from Canada than any other country. And if you are watching a currency pair that involves USD and a currency whose economy is harmed by the rising prices of oil, the demand for USD will rise.

When oil prices are going to rise again, watch for CAD/JPY currency pair. CAD is positively correlated and JPY is negatively correlated. So CAD/JPY has the strongest reaction to rise in oil prices. It can be a very good currency pair to trade during times of rising oil prices.

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