Today We will discuss Correlation b/w Currency & Commodities.
Correlation (Definition) :In the world of finance, how two securities move in relation to each other can be defined as mutually correlated to each other.
It can be classified as:
1) Positive Correlation(Directly proportional)
2) Negative Correlation(Inversely proportional)
1)Positive Correlation:It can be defined as when one security moves in any direction(up or down ) ,the other follows it significantly.
2)Negative Correlation: It can be defined as when on security moves in any direction (up or down), the other do exactly the opposite of first one.For eg. if xyz security moves up ,then second security moves in downward direction.
This are the basic that one should keep in mind before we move forward. Now we will discuss this funda in Indian scenario. We will understand this concept with the help of 2 Commodities Gold & Crude oil in respect to 1 currency USDINR.
In India , as we all know that around 70-80% of crude oil is imported in India. As per international market treaty , we have to pay them in USD. Also prices in Gold are decided according to International market n coz of higher demand in gold from Indian people n jewelers we have to import gold from International market to fulfill our local demand & pay them again in USD. So basically price of USDINR will increase as long as we import things n pay them in terms of dollar.
The US Dollar Index (USDX) is an index (or measure) of the value of the United States dollar relative to a basket of 6 foreign currencies.
It is a weighted geometric mean of the dollar's value relative to other select currencies:
Whenever there is increase in price of USDINR , MCX Gold Prices will also increases , means it has direct correlation with MCX Gold prices in Indian terms. But in International terms Gold have negative correlation with respect to Dollar Index.
Below is the chart showing the negative Correlation between DX & LGD (International Gold).
While this correlation is because It is assumed that value of any currency is measured in terms of how much gold that country has in reserved . USA has the highest gold reserve as compared to all other nations & Many nation had agreed to consider US dollar as benchmark Currency for trade prospective in anywhere around the world. So US dollar remain in demand every time.That is why USA is assumed to be Powerhouse of World Economy.
Why Negative Correlation: It is just coz US dollar has made its standard to be equilant to gold.
Below is the chart of MCX Gold Future & LGD .One can easily see a wide gap b/w MCX gold in red & LGD in blue. This wide gap is due to fluctuation in USDINR. As USD gain prices in INR also Increases irrespective of prices in LGD n vice versa.
Below is the chart of USDINR (spot) & MCX Gold. We can see a direct correlation b/w USDINR & Mcx Gold . Simple reason behind this is we import gold from International market & we have to pay them in terms of dollar. So whenever there is rise price of dollar MCX gold will follow the same pattern.
Below is the chart of MCX Crude(red line) & WTI Crude(blue line). Prices are directly proportional but we can see some wide & narrow gap which is due to fluctuation in prices of INR w.r.t USD. As gap expand means rise in price of USDINR , while contracting gap literally means sell off in USDINR prices. While cross over shows out performance of Crude due to dollar fluctuation.
Below is the chart of MCX Crude (Red), WTI Crude (Blue), USDINR (spot).
Below is the chart of MCX Crude(Blue) & USDINR Spot(red). We can see some wide/narrow gap which is due to rise/fall in price of WTI crude while appreciation/depreciation in INR as compared to USD.
Conclusion : From the above facts , figure & chart we reach to following conclusion.
Gold: If we are trading gold in Indian rupee , we have to keep a track on 2 things.
1) Price in International market i.e. LGD
2) Movement in USDINR.
We have direct correlation with LGD & appreciation in price of USD in terms of Indian market. It means whenever there is increase in price of USDINR , price of Gold in Rupee term will also gain though LGD have no major move or in downtrend
Also , price of gold in rupee term will loose its value when there is decrease in price of USDINR , though LGD have uptrend or sideways move.
& have negative (inverse) correlation With US DOLLAR INDEX.
One should adapt proper strategy to avoid conjunction in prices in LGD & MCX Gold along with USDINR movement.
Also MCX gold follow its particular trend near to festival season irrespective of what ever trend it has in LGD.
Crude Oil: If we are trading Crude Oil in Indian rupee , we have to keep a track on 2 things.
1) Price in International market i.e. WTI Crude Oil
2) Movement in USDINR.
Like Gold , Crude is also very much sensitive to USDINR , means a rise in price of USDINR will boost prices in Crude in Indian terms & vice versa though what ever trend WTI Crude follow.
but WTI Crude Oil have negative correlation with US Dollar Index.
One should adapt proper strategy to avoid conjunction in prices in WTI Crude Oil & MCX Crude along with USDINR movement.
Also MCX Crude Oil closely follow USDINR movement. A fall in WTI Crude along with appreciation in INR w.r.t USD will add on falling pressure in MCX crude oil prices, like it is happening current market .
Correlation (Definition) :In the world of finance, how two securities move in relation to each other can be defined as mutually correlated to each other.
It can be classified as:
1) Positive Correlation(Directly proportional)
2) Negative Correlation(Inversely proportional)
1)Positive Correlation:It can be defined as when one security moves in any direction(up or down ) ,the other follows it significantly.
2)Negative Correlation: It can be defined as when on security moves in any direction (up or down), the other do exactly the opposite of first one.For eg. if xyz security moves up ,then second security moves in downward direction.
This are the basic that one should keep in mind before we move forward. Now we will discuss this funda in Indian scenario. We will understand this concept with the help of 2 Commodities Gold & Crude oil in respect to 1 currency USDINR.
In India , as we all know that around 70-80% of crude oil is imported in India. As per international market treaty , we have to pay them in USD. Also prices in Gold are decided according to International market n coz of higher demand in gold from Indian people n jewelers we have to import gold from International market to fulfill our local demand & pay them again in USD. So basically price of USDINR will increase as long as we import things n pay them in terms of dollar.
The US Dollar Index (USDX) is an index (or measure) of the value of the United States dollar relative to a basket of 6 foreign currencies.
It is a weighted geometric mean of the dollar's value relative to other select currencies:
- Euro (EUR), 57.6% weight
- Japanese yen (JPY) 13.6% weight
- Pound sterling (GBP), 11.9% weight
- Canadian dollar (CAD), 9.1% weight
- Swedish krona (SEK), 4.2% weight
- Swiss franc (CHF) 3.6% weight
Whenever there is increase in price of USDINR , MCX Gold Prices will also increases , means it has direct correlation with MCX Gold prices in Indian terms. But in International terms Gold have negative correlation with respect to Dollar Index.
Below is the chart showing the negative Correlation between DX & LGD (International Gold).
While this correlation is because It is assumed that value of any currency is measured in terms of how much gold that country has in reserved . USA has the highest gold reserve as compared to all other nations & Many nation had agreed to consider US dollar as benchmark Currency for trade prospective in anywhere around the world. So US dollar remain in demand every time.That is why USA is assumed to be Powerhouse of World Economy.
Why Negative Correlation: It is just coz US dollar has made its standard to be equilant to gold.
Below is the chart of MCX Gold Future & LGD .One can easily see a wide gap b/w MCX gold in red & LGD in blue. This wide gap is due to fluctuation in USDINR. As USD gain prices in INR also Increases irrespective of prices in LGD n vice versa.
CRUDE OIL
Another Commodity is Crude oil (Black Gold).Below is the Chart of WTI crude & US dollar Index.It also has Negative correlation with USD coz USA is the largest consumer of Crude Oil.USA also has to import crude oil from gulf countries , pay them in dollar .
Below is the chart of MCX Crude (Red), WTI Crude (Blue), USDINR (spot).
Below is the chart of MCX Crude(Blue) & USDINR Spot(red). We can see some wide/narrow gap which is due to rise/fall in price of WTI crude while appreciation/depreciation in INR as compared to USD.
Conclusion : From the above facts , figure & chart we reach to following conclusion.
Gold: If we are trading gold in Indian rupee , we have to keep a track on 2 things.
1) Price in International market i.e. LGD
2) Movement in USDINR.
We have direct correlation with LGD & appreciation in price of USD in terms of Indian market. It means whenever there is increase in price of USDINR , price of Gold in Rupee term will also gain though LGD have no major move or in downtrend
Also , price of gold in rupee term will loose its value when there is decrease in price of USDINR , though LGD have uptrend or sideways move.
& have negative (inverse) correlation With US DOLLAR INDEX.
One should adapt proper strategy to avoid conjunction in prices in LGD & MCX Gold along with USDINR movement.
Also MCX gold follow its particular trend near to festival season irrespective of what ever trend it has in LGD.
Crude Oil: If we are trading Crude Oil in Indian rupee , we have to keep a track on 2 things.
1) Price in International market i.e. WTI Crude Oil
2) Movement in USDINR.
Like Gold , Crude is also very much sensitive to USDINR , means a rise in price of USDINR will boost prices in Crude in Indian terms & vice versa though what ever trend WTI Crude follow.
but WTI Crude Oil have negative correlation with US Dollar Index.
One should adapt proper strategy to avoid conjunction in prices in WTI Crude Oil & MCX Crude along with USDINR movement.
Also MCX Crude Oil closely follow USDINR movement. A fall in WTI Crude along with appreciation in INR w.r.t USD will add on falling pressure in MCX crude oil prices, like it is happening current market .
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