Currency-Commodity Correlations

2022: crude averaged 94 dollars and the Canadian dollar fell 7%

The correlation broke, publicly and expensively, in 2022. WTI averaged roughly 94 USD a barrel for the year against roughly 68 USD in 2021, and traded above 120 USD in the spring. On the commodity-currency logic, the Canadian dollar should have had an excellent year.

It did not. USD/CAD began 2022 near 1.2640 and ended near 1.3550, a fall of about 7% in the Canadian dollar against the US dollar over a year when its main export was up sharply.

The reason was that a different driver took over. The Federal Reserve raised rates faster and further than the Bank of Canada, and the interest rate differential dominated the terms-of-trade story for most of the year. This is the general pattern of correlation failure: the relationship does not weaken gradually, it gets outranked by a larger force, usually monetary policy divergence or a risk-off shock.

The dollar leg inside every commodity quote

Gold, oil, copper and most other benchmarks are quoted in US dollars, which means every position in them contains a currency component you did not deliberately take. If the dollar strengthens 1% and gold's value in other currencies is unchanged, the dollar price of gold falls about 1% by arithmetic alone.

That is why the dollar index sits on so many commodity traders' screens. It is also why the inverse gold and dollar relationship is a tendency rather than an identity: in 2022 both rose together for stretches, as safe-haven demand lifted the dollar and gold at the same time. When the driver is fear rather than rates, the usual sign can reverse.

Counting three positions as one

Here is the failure that actually empties accounts. You are long gold at 1% risk, long AUD/USD at 1% risk and short USD/CAD at 1% risk. That looks like 3% spread across three markets and two asset classes.

It is one trade. All three profit if the US dollar weakens and all three lose if it strengthens, and a 1.5% dollar rally moves every one of them against you within the same hour. You are risking 3% on a single view with three sets of spreads to pay for the privilege.

The correct handling is to cap exposure by theme rather than by ticker. Decide the maximum the account may risk on a dollar view, commonly 2% to 3%, and count every position that expresses it against that ceiling. The risk management guide sets out the arithmetic, and the position size calculator is where you split the ceiling across the trades you actually want.

Remember also that correlations tighten in stress. Positions that have diversified each other for months can converge in an afternoon, so the diversification benefit disappears exactly when you were relying on it.

A five-minute check before the second position

Before adding a correlated trade, do three things. Write down what each open position is really betting on, stripped of its ticker: "short dollar", "long global growth", "long risk appetite". If two entries have the same sentence, they are the same trade.

Then look at the rolling correlation over 60 days rather than a headline long-run figure, since these relationships drift. And check whether either currency's central bank is in an active divergence with the other's, because that is the force that most often overrides the commodity link. If you are new to reading the currency side of this, the forex primer covers what actually moves a pair.