How Currency Correlation Works in Forex Trading

How Currency Correlation Works in Forex Trading
March 2, 2021 Market Traders Institute

How does currency correlation control multiple asset classes? If a currency moves (changes price), then another economic variable moves also. But the key here is that the currency always moves first. In this lesson, you’ll learn why it’s very important for traders to understand how these two factors are connected.

My name is Tyson Clayton, Senior Currency Strategist for Market Traders Institute. I’m a master Forex instructor with over 20 years of experience teaching student traders how to take ultimate control over not just their finances, but their lives.

Let’s go over a few commodity currencies and how they work in the market. For example, the price of gold is tied to the Australian Dollar (AUD). Likewise, the price of meats and cheeses is tied to the New Zealand Dollar (NZD). Meanwhile, oil’s price is connected to the Canadian Dollar (CAD) and the Great British Pound (GBP).

When commodities rally, you can expect for these currencies to go up in value. In other words, if the market is going through an inflationary period, you should look to invest in these commodities, which will typically rise and fall at the same time.

In comparison to commodities, we also have what are called consumer-based economies. These economies are in countries that tend to borrow money in order to buy commodities from another country. For example, a country may borrow money from Japan in order to buy foods or metals from another country. Or a country could borrow from the United States (USD) or Switzerland (CHF) to buy land or oil from another nation.

The reason why currency correlation is so important is because when currencies move, then other indicators, such as stocks or housing prices, will also move along with it. In another example, if China’s economy slows down, that situation is going to affect the Australian Dollar. If oil prices drop, then the CAD and the GBP will also trend down in turn.

Traders need to know how currency correlation works in order to create a successful strategy. It’s also important to understand how hedge funds protect themselves based on interest rates and currency correlation. These are the types of relevant topics that Market Traders Institute’s trainers cover in their live sessions with our students.

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