HOW TO STUDY THE COMMODITY MARKET TO CONDUCT THE FOREX FUNDAMENTAL ANALYSIS

Commodity market analysis, in order to conduct forex fundamental analysis, is one of the most important dimensions of forex fundamental analysis. When I was introduced with the fact that the US dollar is negatively correlated with gold and oil price, I started searching on "how is forex affected with the commodity market?" 

I discovered a lot studding some books and online free resources, and would be sharing with you on this blog. With out the commodity market analysis, effective fundamental analysis of currency market is almost impossible. 

Here in this post, I will only focus on the way to conduct the commodity market analysis, later I will write on the currencies and currency pairs that are affected by the commodities.

When is a currency affected by the price of a commodity?

The answer is very simple. If an economy produces, exports or imports a commodity, the currency of the economy will be affected by the price of that commodity. But a currency will be significantly affected by the price of a commodity, if the economy of the currency is included in the list of top exporters or importers of the commodity.

How is the currency of the economy that exports a commodity affected by the price of that commodity? 

If an economy is a net exporter of a commodity, the value of the currency of that economy increases with the increase in price of the commodity, and decreases with the decrease in price of the commodity. 

For example, Canada is a net oil exporter, and it is included in the list of top ten oil exporters of the world, that's why the value of Canadian Dollar go up with the increase of oil price.  

How is the currency of the economy that imports a commodity affected by the price of that commodity? 

If an economy is a net importer of a commodity, the value of the currency of that economy increases with the decrease in price of the commodity, and decreases with the increase in price of the commodity. 

For example, United States is one of the top ten importer and consumer of oil, that's why US Dollar is negatively correlated with the oil price.

How the price of a commodity is determined in international market?

When a trader already learned the correlation between a currency and a commodity, in next step, he/she should learn "how the price of a commodity is determined in the international market". 

Simply, the price of a commodity in international market is determined by the demand and supply of the commodity. If the demand of the commodity goes up, the price of the commodity also goes up, on the other hand, if the supply of the commodity goes up, the price of the commodity goes down. 

How traders can conduct commodity market analysis?

If a trader intended to trade a currency pair that is affected by a commodity price, he/she should conduct the analysis on the commodity. Almost all major currency pairs are affected by the commodity prices.

Commodity prices primarily affected by the demand and supply news. Traders should learn the list of top exporters and importers of a commodity to conduct analysis on the commodity. Some geopolitical news can also affect the price of a commodity.

Dear Traders, this post is just a summary of the effects of commodity market in determining the value of a currency, and the importance of commodity market analysis in forex trading. You have to wait for the upcoming posts to explore the whole picture.

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