In this episode, Mike and Rory discuss the importance of understanding the correlation between commodities and the respective FX pair. The currencies highlighted in the podcast include Australian Dollar, Canadian Dollar, Euro, Great British Pound, Norwegian Krone, and US Dollar. At the beginning the blokes mention how 2 of the main traded FX pairs (EURUSD & GBPUSD) are not directly pegged to commodities rather the moves are based on macroeconomics such as changes in interest rates, politics, or other economic indications.
Mike and Rory discuss the importance of understanding the country behind the currency. For example, when looking at CAD or NOK, it’s important to understand that their main export is oil therefore demand for their currency has a strong correlation with the demand for oil. Looking at the chart of USDCAD or USDNOK and overlaying the WTI Crude or Brent price you will be able to see a strong correlation between the two. Rory has also shared resources in the App to help you calculate the correlation between two variables such as USDCAD and WTI Crude prices.
Mike also discusses the importance of having a macro picture and not exclusively focusing on technical analysis. He explains if these ideas were presented to serious investors such as those at Investment banks that they would simply laugh you out of the room. Mike explains that you need a solid fundamental picture with trade data of the country and all aspects of the macro covered and only use technical to gauge entry and exit positions.