Forex »Use gold to trade pairs including the US dollar

Since the beginning of the year, gold has had a negative correlation with the US dollar most of the time

When the value of the US dollar increases in forex, many assume that the value of gold should decrease. And most of the time it is. However, correlations are not always perfect from 1 to 1. Therefore, traders should look at the relationship between gold and the US dollar over time and not in the short term.

In the chart of the US dollar index (DXY) below, the price is reaching new local highs and testing a long-term trend line dating back to 2011 (red). Note the correlation coefficient at the bottom of the graph. There has been a negative correlation most of the time since the beginning of the year, however there was a short period in February and July where the relationship was positive. Also note that the relationship is not always to the extreme. Traders generally look for correlation coefficients above +0.80 or below -0.80 for high correlation. This will help in making better trading decisions. The correlation was -0.90 at the end of September, but currently stands at -0.68. It is still inversely related but not in the extreme.

US dollar index (DXY) daily chart.

Source: Tradingview, Stone X

However, just because gold’s correlation isn’t always extreme versus DXY doesn’t mean there aren’t any correlations to other US dollar pairs that forex currency traders can look for. The South African rand is often related to gold (or inversely related to the USD / ZAR pair), as South Africa is a major exporter of gold. The current correlation coefficient between gold and USD / ZAR is -0.83 on the daily timeframe. Therefore, traders can use the gold price to make decisions regarding the USD / ZAR pair.

USD / ZAR daily chart

forex usd / tsar 06102021
Source: Tradingview, Stone X

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The USD / CHF pair is often used as a proxy for forex currency traders who do not have access to trading on DXY indices. Notice at the bottom of the screen that the correlation coefficient is -0.81. The correlation has been negative since the beginning of the year and is currently at an extreme level (below -0.80). Therefore, traders can use gold to determine the direction of the USD / CHF.

USD / CHF daily chart

forex USD / CHF 06102021
Source: Tradingview, Stone X

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Over a daily time frame, gold (XAU / USD) has moved to lower highs since hitting all-time highs in August 2020. Since mid-May, gold has hovered around the declining trend line (green ) from these highs to 2075.11. Note that the last 4 daily candlesticks have long and bottom wicks. This involves sellers entering early in the day and buyers pulling gold from the lows to push it higher towards the close. If buyers can push the price above the 50 and 200-day moving averages at 1782.25 and 1800.08 respectively, there is room for gold to rise to the horizontal resistance at 1834. If that happens, look in the forex for USD / CHF to return to 0.9200 and USD / ZAR to test recent lows near 14.10.

Gold daily chart (XAU / USD).

or xau / usd 06102021
Source: Tradingview, Stone X

However, if gold fails to rise and the bears take control, the price could head towards the Aug 9 lows at 1679.13. This could push USD / CHF towards the April 1 high of 0.9473 and USD / ZAR towards 15.3950.

The US dollar index (DXY) and gold (XAU / USD) are usually inversely correlated, meaning the two assets move in opposite directions. However, most of the time the correlation is not strong enough to be meaningful. But if traders are looking for correlations between gold and other currency pairs, including the US dollar above +0.80 or below -0.80, they will have a better chance of using the precious metal to help trade the US dollar on forex.

by Joe Perry, Forex.com “ Official site

Disclaimer: The information and opinions contained in this report are provided for general information purposes only and do not constitute an offer or solicitation to buy or sell any forex or CFD exchange contracts. Although the information contained herein comes from sources believed to be reliable, the author does not guarantee its accuracy or completeness and assumes no responsibility for any direct, indirect or consequential damages that may arise from anyone who relies on such information.

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