Commodities and Currencies: Inter-Market Analysis

Commodity markets are becoming increasingly important in today’s financial scenario. Many investors, traders and fund managers are now shifting their attention towards asset classes such as Crude Oil, Natural Gas, Gold, Silver, Wheat, Coffee or Sugar. Furthermore, the credit crunch brought a great deal of market instability and many equity indices, as well as single stocks, have been abandoned by or lost their appeal to many market players. There are several liquid commodities in the world but the present research will concentrate on, arguably, the heaviest in terms of volume: WTI Crude Oil, Gold and Henry Hub Natural Gas. It is important to point out that the European oil benchmark, the Brent Crude, has been deliberately omitted from the aforementioned list, although very liquid, but it will be the focus of another research. This research will present the results of an inter–market analysis where we compare and contrast the performances of above mentioned 3 commodities against a basket of currencies. The currency exchanges that have been selected are either very liquid (Euro, Japanese Yen, British Pound, Swiss Franc) or related to countries whose trade balances heavily rely on commodities and this is the case for South Africa, Canada, Australia and New Zealand (some market players can also refer to these exchanges as commodity currencies). The research has been conducted using a database consisting of daily data ranging from October 2011 until the 25th of June 2013. Consequently, our study aims to capture the medium–to–long term relationship that WTI Crude Oil, Gold and Henry Hub Natural Gas futures have with those exchanges. The first commodity that will be examined is the WTI Crude Oil:

WTI Crude

The American crude oil chart shows a very strong relationship with Euro, Swiss Franc and South African Rand. However, the correlation is strong and positive for Swiss Franc (+0.36) and Euro (+0.34) but it is negative for the South African currency (-0.34). The positive connection with the Euro is a consequence of the fact that the Single currency is responsible for the 56.7% of US Dollar Index fluctuations. The Swiss Franc, being a European currency, shows a robust positive correlation to the WTI (+0.36), however, the chart signals that the Swiss Franc is not a good hedging tool for the American oil market. Usually, the Swiss currency is adopted by many portfolio managers and market players as a hedge against volatile periods in risky assets but, when it comes to WTI oil, this is not the case. The negative correlation with the South African Rand (-0.34) is given by the fact that South Africa is the second largest oil refiner in Africa. Nevertheless, almost all the oil that is imported belongs to OPEC countries. Consequently, the Rand is more linked to the price of oils extracted from OPEC countries than to the American West Texas Intermediate. Finally, if we exclude a “mild correlation” with the Australian and Canadian Dollars, the remaining exchanges (Yens, British Pounds and New Zealand Dollars) do not show a great sensitivity to WTI price changes. The next market under examination will be Gold:


The gold market has very good positive connections with many asset classes. If we exclude New Zealand Dollars (+0.07), the Euro (+0.20) and the South African Rand (-0.65), gold futures are strongly bounded to many exchanges. The strong positive correlation to Australian Dollars (+0.62) is obvious because Australia is one of the largest gold exporters in the world while the +0.69 rapport with the Japanese Yen is a signal that many market players started to use again gold as a hedging tool for their portfolios. Furthermore, Canada (+0.57) has large gold mines while the UK (+0.63) is a strong importer and it primarily purchases gold for luxury goods or investment purposes. Once again the South African Rand is a standalone market because its strong negative correlation to gold futures (-0.65) is not just due to portfolio hedging but also to strong fundamental reasons. Specifically, the South African mining industry has been subject to many strikes in the last 3 – 4 years that greatly influenced its extraction rate. Consequently, the SA gold’s output precipitously fell and this could have caused a major loss of “sensitivity” between gold prices and the local currency. The next commodity market is the Henry Hub Natural Gas:

Henry Hub Natural Gas

The Henry Hub is the core distribution point in the natural gas pipeline scheme located in Louisiana, USA. Natural gas futures traded on the NYMEX have been named after it because of the great logistic importance of this area. The above reported chart shows an unstable negative correlation to Australian, Canadian Dollars and British Pounds (-0.22, -0.30 and -0.33 respectively), a rather weak but positive link to New Zealand Dollars and Euros and no correlation at all to Swiss Franc futures(-0.03). On the other hand, there are two currencies that are strongly correlated to natural gas prices: Japanese Yen and the South African Rand. The reasons Japanese Yens have a robust negative relationship (-0.57) to the Henry Hub is that the Asian country has recently doubled its nat–gas consumption but the local demand is almost entirely satisfied via imports (circa 4,500 billion cubic feet). Furthermore, the Japanese Yen is often considered to be a “safe haven” type of investment, hence, many market players will tend to buy the Asian currency when risky assets plummet. The negative relationship between Yens and nat–gas prices is an evident sign that many portfolio managers tend to hedge their natural gas positions with the Japanese Yen. Conversely, the great explosion in natural gas consumption in South Africa (over 160 billion cubic feet in 2011 against 58.2 billions in 2000) and the low import levels make the South African currency rather “susceptible” to oscillations in natural gas prices.

Let’s summarize the main findings in a few bullet points:


1) The correlation is strong and positive with Swiss Franc (+0.36) and Euro (+0.34) but it is negative for the South African currency (-0.34)

2) South Africa is the second largest oil refiner in Africa but almost all the in–flowing oil is imported from OPEC countries. This explains the negative correlation (-0.34) with the Rand


1) Australia is one of the largest gold exporters in the world, hence, Australian Dollars are strongly connected to this commodity (+0.62)

2) The +0.69 rapport with the Japanese Yen implies that gold is still considered to be a hedging tool for portfolio risk

3) Canadian Dollars are positively correlated to gold (+0.57) because Canada has large gold mines

4) There is a positive and robust link between gold and British Pounds (+0.63) because UK is a strong importer and Great Britain buys gold for luxury goods or investment purposes

5) The South African gold’s output plunged in recent years due to several strikes in the mining industry. Hence, the drop in the SA gold extraction rate could have caused the negative connection between gold prices and the local currency (-0.65)


1) There is a robust negative relationship with Japanese Yens (-0.57) because Japan increased its natural gas consumption but it imports almost all the natural gas needed (circa 4,500 billion cubic feet)

2) Negative correlation with the Japanese Yen (-0.57) implies that natural gas portfolios tends to be hedged with the Asian currency

3) The large increase in natural gas consumption in South Africa (over 160 billion cubic feet in 2011 against 58.2 billions in 2000) and a strong local production strengthened the link between the South African currency and natural gas prices (+0.73)

All traders and investors interested in trading commodities and in particular Crude Oil and Gold are strongly advised to read the following HyperVolatility researches:

Commodity Volatility Indices: OVX and GVZ

“The Pricing of Commodity Options”

“Gold Market Performance in 2012”

“The Oil Arbitrage: Brent vs WTI”

“Trading Gold and Silver: A Realized Volatility Approach”

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