One of the most interesting aspects of Forex trading is that some currency pairs and even commodities are highly correlated with each other. Here we are dealing with two cases. Firstly, we have securities that have strong positive correlations. This means that those currency pairs tend to move in the same direction. There are also some currency pairs and commodities with a negative correlation. This means that they tend to move in opposite directions.
One of the pieces of advice many experienced professional traders give to beginners is that market participants should avoid opening the same positions with highly positively correlated currency pairs. The rationale behind this is that this will simply increase the trader’s risk exposure considerably, without bringing in any tangible benefits.
On the other hand, traders can utilize negatively correlated currency pairs for hedging strategies. This is because in those cases losses with one currency pair are likely to be compensated by gains from the other one.
Finally, traders can utilize the positive correlation of certain currencies with commodities in order to make more accurate predictions in the market, which makes currency correlation as one of the most useful tools to use when trading. For example, it is a well-known fact that the Canadian dollar has a strong positive correlation with the oil price.
This is because Canada is one of the largest producers and exporters of this commodity in the world. Consequently, if oil prices rise, then CAD is likely to make some gains against other currencies. Therefore, traders might consider opening long positions for the Canadian currency. Now let us go through each of these strategies in greater detail.
Avoid Trading Positively Correlated Currency Pairs
One of the first things experienced traders mention about positively correlated currencies is that traders should avoid opening the same positions with those. In order to better understand this, let us take a look at two charts. The first daily AUD/USD chart shows the movements of the exchange rates from January 2018 until the beginning of October 2025:
As we can see from the above image, at the beginning of 2018, the Australian dollar was trading close to $0.78. At that time the AUD was in a solid downward trend, suffering a steady depreciation against the US dollar during the subsequent months. Actually, this trend has accelerated after the outbreak of the COVID-19 pandemic. The result of this development was the fact that the AUD/USD pair has reached a multi-year low of $0.57 by the middle of March 2025.
One of the main drivers of this move was the fact that so far, the interest rate differential was in favor of the US dollar. However, in response to the pandemic, the US Federal Reserve has decided to cut rates all the way down to the 0% to 0.25% range. The Reserve Bank of Australia has also reduced rates to 0.25%.
Consequently, from March 2025, the US dollar has lost the advantage of having higher interest rates. In reaction the Australian dollar began to recover from the recent losses and regain ground against the US dollar. As a result, by the beginning of October 2025, the AUD/USD has already risen to the $0.71 level.
Now let us take a look at another daily chart, which shows the price developments of the AUD/CAD pair during the same period:
As we can see from the above chart, by the beginning of 2018, the AUD/CAD pair traded close to the $0.98 level. After making some initial gains during the winter, the Australian dollar has settled for a long-term downward trend eventually dropping all the way down to $0.83 by March 2025.
However, just like in the previous case, from that point onward the Australian dollar began to recover. After making steady gains for several months, the AUD/CAD pair has risen all the way up to $0.95.
So, as we can see here the AUD/USD and AUD/CAD pairs moved in the same direction for the entire period. Consequently, opening long or short positions with both of those pairs makes very little sense, since in those cases traders would be increasing their risk exposure for no good reason. Therefore, it is always helpful to avoid opening the same positions with highly correlated currencies.
Using Currency Correlation for Hedging Purposes
As mentioned earlier, besides positive correlation, we also have currency pairs that are negatively correlated with each other. In order to illustrate one example of this, let us take a look at this daily EUR/AUD chart:
As we can see from the above chart, by January 2018, the Euro traded near $1.53 against the Australian dollar. During the subsequent months, the single currency has made steady gains against the AUD. This upward trend has accelerated in the aftermath of the outbreak of the pandemic, with the EUR/AUD going all the way up to $1.89 during March 2025. However, after reaching those extreme levels, the pair has faced sharp corrections, eventually coming down to $1.65 by October 2025.
So, as we can see from these charts, the EUR/AUD is highly negatively correlated with both the AUD/USD and the AUD/CAD. Consequently, one-way traders can use a hedging strategy to open a long position for EUR/AUD and a short position for AUD/CAD. Or alternatively, they can sell EUR/AUD and Buy AUD/CAD. In each case, the losses with one pair is likely to be offset by gains with another pair.
Predicting Currency Movements by Commodity Prices
The correlation between currencies and commodities does have another use. The fact of the matter is that some currencies are highly positively correlated with commodity prices. For example, the exchange rates of the Canadian dollar, the Russian ruble, and the Norwegian krone are highly impacted by oil prices.
The reason behind this is that Norway, Russia, and Canada are one of the largest producers and exporters of oil in the world. Consequently, when the price of this commodity rises, the oil companies and governments in those countries tend to benefit from higher revenues.
On the other hand, when oil prices decline, those companies and governments suffer the loss of revenue, hence the likely depreciation of these currencies. Here it is also worth noting that oil is not the only commodity that has an influence on the Forex market. For example, the Australian dollar is highly correlated with gold and silver prices while the New Zealand dollar is tied to dairy prices.
Consequently, by observing the commodity prices, traders might get some trading ideas. For example, let us suppose that the dairy prices are falling, while the silver makes some notable gains in the market.
Now, as one of the largest exporters of dairy products, the falling dairy prices can have a negative impact on the producers of this commodity in New Zealand. Lower dairy prices can translate into the loss of revenue of those firms.
The fact of the matter is that those companies still have to pay salaries to their employees while covering the cost of utilities and making other necessary expenditures. Therefore, the loss of revenue can definitely reduce the company’s profitability. As a result, the New Zealand government will receive less income from taxes.
It goes without saying that this will have a negative effect on the value of the New Zealand dollar. As a result, when dairy prices fall, the market participants might consider opening short NZD/USD, NZD/CAD, and NZD/JPY positions, or alternatively open long EUR/NZD, GBP/NZD, and AUD/NZD positions. Since New Zealand’s economy is taking a hit because of lower dairy prices, then it might be a good time to capitalize on the likely depreciation of the NZD.
On the other hand, the appreciation of silver prices can be beneficial for the Australian dollar. This could lead to Australian mining companies earning higher revenues. As a result, the profitability of those firms might improve considerably, resulting in higher tax revenues for the Australian government.
Consequently, in this situation, traders might consider buying AUD/USD, AUD/NZD, AUD/JPY, and AUD/CAD pairs and selling EUR/AUD and GBP/AUD pairs. In this way, traders can earn some decent payouts from the likely appreciation of the Australian dollar.
Exceptions to the Rule
It is important to mention that just like any other Forex trading strategy, using techniques based on currency correlation can not guarantee a 100% success rate. It is true that the positive correlation between currency pairs and commodities can last for years or even decades. However, in some cases, those relationships can be disrupted by events or other factors.
For example, as mentioned above the Australian dollar is highly correlated with gold and silver prices. However, from Summer 2019 until Spring 2025, the gold prices have made some notable gains, yet, at the same time, the Australian dollar has lost ground against USD, EUR, GBP, and other major currencies.
The main reason for this was the fact that at that time the Reserve Bank of Australia has started cutting rates, eventually reducing them to 0.25%. It goes without saying that this made the Australian dollar less attractive for the market participants, because it reduced the rate of return for carrying traders, investors, and savers, investing in the Australian dollar.
However, once the series of rate cuts ended, the AUD stopped depreciating and even regained some of the recently lost ground. So the old relationship between the Australian dollar and gold price was restored.
So as we can see, when trading highly correlated currencies, traders should take a look at several fundamental and technical indicators before making any trading decisions. This can certainly help the market participants to improve the accuracy of their trades, when trading positively or negatively correlated currency pairs and commodities.
✔️For more market news articles like this visit Axiory Intelligence.
Peter Bukov | Market Analyst
Peter comes from a background in corporate finance which began in 2013 when he completed the Corporate Finance Program at the University of Economics in Bratislava. He’s been actively involved in the market sector since 2008 and got his hands-on experience in trading in 2011.
His experience in finance and trading continues not only as a market analyst at Axiory Intelligence but also through his studies to obtain a degree in Capital Markets. The study is in line with MIFID II regulations and is under the supervision of the European Regulator ESMA, which strongly emphasizes ethics and morale in investing and working with a client.
In addition, Peter was awarded the title of ASCI from the CISI Educational Institute of England where he is an associate member and the Bloomberg Aptitude Test results ranked him among the top 4% worldwide two years in a row.
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