Commodities have been part of an FX trading account for several years now. Technological advances allowed brokers to offer access to various other markets than the classic FX. As such, from the same trading account, one can analyze and trade commodities, indices, or even fixed-income products in some cases.
It is only normal. Because financial markets are correlated, the moves in one market often have an impact on other markets. This is precisely what happened this year with the commodities markets – the strong advance in the two months of the trading year disrupted other markets, from equities to FX. Also, the run higher in commodity prices leads to changes in macroeconomic expectations for the rest of the year. For example, the price of oil already reached the year-end target of most investment banks in the world. Should the bullish run continue, the investing community needs to adapt quickly or face the consequences of fast-moving markets.
S&P GSCI Index – The Second-Best Start to a Year on Record
The S&P Goldman Sachs Commodity Index (GSCI) is up 16.05% this year already. The move higher has ripple effects on other markets if one is only curious enough to check the components of the index and what markets it tracks.
This is mostly an energy index, in the sense that energy is responsible for 61.71% of its weight. In this basket, the index considers the WTI crude oil, Brent crude oil, RBOB gasoline, heating oil, gasoil, and natural gas. The first two, WTI and Brent crude oil are responsible for more than half of the energy sector in the index.
Crude oil has been the star of the year so far. It reached above $63 and the move higher triggered a sustained move higher in the Canadian dollar pairs. For instance, the USDCAD declined all this time, reaching levels well below 1.30, a key area for long-term interpretation of this particular exchange rate.
Industrial metals (10.65%), agriculture (15.88%), livestock (7.25%), and precious metals (4.5%) are the other three areas covered by the S&P GSCI index. In the first category, the index considers the changes in the price of aluminum, copper, lead, nickel, and zinc. Australia is a major industrial metals producer, so the rising prices for the metals in these categories supported the Australian dollar on every dip.
It is obvious by now the effects of the commodities prices on the FX market. However, this is just an example, as one can easily make a strong case of higher inflation due to rising oil prices.
To sum up, commodities should always be monitored by FX traders because their price movements have a strong impact on all markets.