Commodity prices such as gold and oil can have tremendous effects on the currency markets.
Seasoned traders will often watch gold and oil futures to predict movements in specific currencies. This strategy works well when a country is a significant producer or importer of gold or oil.
Changes in the price of those commodities translate into changes in revenue for the domestic corporations. The currencies most directly affected are AUD, CAD, NZD, and JPY.
Looking specifically at gold, trading the Australian dollar is similar to trading gold. The Australian dollar has an 80% positive correlation with gold prices.
This means that when gold prices rise, AUD appreciates as well. Traders who understand and often trade gold have a lead on others when trading AUD.
The key advantage to trading gold and AUD/USD together is that it allows traders to leverage the same views, while diversifying risk.
The strong correlation between gold and AUD/USD stems from Australia’s status as the world’s third largest producer of gold, representing over $5 billion in exports each year.
As gold prices rise because of weakness in the U.S. dollar or gold supply dwindles, Australian domestic gold producers benefit significantly. Foreigners will have to pay more to import gold, which leads to a rise in the Australian dollar.
In terms of non-commodity currencies (EUR, GBP, etc.), Gold prices can tie in very closely with strength or weakness in the USD. Likewise with Oil. Both commodities are priced in USD terms, so weakness or strength in the Greenback will impact on those prices.
That said, it's not a 100% thing. Commodities have supply and demand considerations which have pricing impact not at all related to currency values, plus flight to safety considerations for gold in the case of global instability. You cannot assume corellation all the time.