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The idea behind calling them commodity currencies is that these currencies supposedly trade based on the underlying prices of major commodities, most typically metals (gold) and oil. The gist is that if, for example, gold and other metals are strengthening, AUD and CAD should benefit from higher gold prices, because both Australia and Canada are major metals and gold producers. Canada is a significant oil producer, so changes in oil prices ostensibly impact the value of the Canadian dollar.

A fair amount of misinformation on the Internet purports a strong link between certain commodities and certain currencies. To be sure, sometimes a relationship does exist between those currencies and certain commodities. But the relationship is not as strong as you may be led to believe, and it’s certainly not strong enough to base any short-term trading strategy on. Don’t fall for it.

There are some correlation studies ran among gold, oil, and the three currencies over three different time period ending in March 2007: five years, one year, and one month. We also threw in the U.S. dollar index – a composite of the value of the U.S. dollar against six major world currencies – for comparison’s sake.

A correlation coefficient is a statistical measure of how closely two securities values change relative to each other. Coefficients can range from +1.00 to -1.00, with a coefficient of +1.00 meaning the two securities are perfectly positively correlated (meaning, a 1 percent gain in one would see a 1 percent gain in the other). A coefficient of -1.00 would mean the two are perfectly negatively correlated (meaning, a rise of 1 percent in the first would see a decline of 1 percent in the second). A coefficient of zero means there is no statistically identifiable relationship, and the two are said to be non-correlated. Also, correlations exist over time. What’s closely correlated today may not be so closely correlated tomorrow, or next month.

Here are the results of the studies:

• The highest correlation coefficient overall was between gold and AUD in five years at +0.57, but the USD index also showed a -0.53 coefficient for the same period, meaning that the Australian dollar was only slightly more (positively) correlated to the price of gold than the USD (negatively) was over five years.

• In the one-year period, the correlation coefficients fell to around +0.3 to +0.5 for the three currencies, while the USD index dropped to -0.47.

• In the one-month period (admittedly, too few observations to be statistically reliable, but just to show you), the correlations dropped to about +0.2, while the USD index remained at -0.48.

• Against oil, the highest correlation coefficient overall was against the Canadian dollar in the one-year period at +0.29, while the USD index came in at -0.21 for the same period.

In short, the so-called commodity currencies displayed little more correlation to gold and oil than the U.S. dollar did, and the correlations that did appear were generally weak. That’s not very much to hang your hat on statistically speaking, especially in the short term, where most of the trading gets done.

Instead of thinking of these currencies are commodity-price driven, think of commodity price movements are just one factor affecting these currencies.