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Commodity Forex pairs are currencies that are associated with the country's ability to produce and export commodities. Oil, natural gas, minerals, and dairies are all products that can make up a large part of the country’s economy.
Forex traders can tie major currencies to a currency that is backed by a commodity-based economy, such as Australia, Canada, or Saudi Arabia, the countries that are exporters of gold, oil, or other natural resources. Commodity currency pairs are affected by the price of these exports, which are mostly traded in the US dollar.
Commodity currencies require extended knowledge about trading commodities, where traders keep their eyes on global trading patterns and the prices of general commodities. These currencies are highly liquid and provide moderate volatility.
To help you trade commodity currencies successfully, we have prepared the following guide to clarify everything you need to know about commodity currency trading, including:
Commodity currencies are highly sensitive to commodity price changes. There are economies that rely majorly on producing and exporting certain goods, and any change in the prices of these goods, taxes on them, and trade volume will affect the economic condition of that country.
There are many currencies that are based this way, especially when the country exports a crucial commodity like crude oil, or other natural resources and minerals. These goods hold significant value and are traded widely around the world.
Since the USD is the currency of world trade, most traded commodity currency pairs include the US dollar and a commodity-based currency. Countries like Australia, New Zealand, Canada, Norway, and Saudi Arabia rely heavily on exporting natural resources.
Currency pairs that include a commodity currency in Forex are volatile. In case the price of any commodity changes, the exchange rate of the traded pair fluctuates.
For example, Australia is an exporter of gold, and its economy relies largely on gold exports. If the world witnesses a financial crisis, most traders will turn to buying gold as a reserve against inflating currencies. When the demand for gold increases, the gold’s price increases as well, which supports the Australian economy and the Australian dollar.
As we mentioned previously, there are several countries that base a large part of their economy on production and trading. However, not every commodity exporter qualifies to be a good match in Forex pairs.
Countries like Brazil, Venezuela, Norway, and Saudi Arabia are a few of the biggest producers of natural resources. However, they are not considered when we talk about commodity currency pairs in Forex, simply because their local currency is not globally traded.
There are a few currencies that make a good fit for commodity currency pairs, these currencies are traded at a wider magnitude and hold historical value in the Forex market.
The Australian dollar is one of the most traded commodity currencies. In fact, AUD/USD is considered one of the most volatile currency pairs. The Australian economy relies heavily on exporting coal, iron ores, and dairy products, among other things. The value of the AUD has been fluctuating in times of economic recessions and crises.
Since the USD denotes the prices of oil, coal, and most traded commodities, the best combination for the AUD is to pair it with the US dollar. In the 2007-2008 financial crisis, people started buying more gold as most currencies were declining, which caused the AUD to appreciate against the USD.
Additionally, the value of this pair, which is also called “Aussie”, is affected by trading activity with China. China is a big importer of Australian goods, and if the Chinese economy is doing well and imports more Australian goods, the AUD will have higher demand and will appreciate.
New Zealand is a big producer and exporter of dairy products as well as beef, wool, timber, and more. The prices of these commodities are denoted in USD worldwide, and Forex traders usually pair the USD with the NZD.
Australia and Asian countries are the main consumers of New Zealand's exported products, which links the NZD's value with the economic performance of these Asian countries, including China and Japan.
The interest rate in New Zealand is generally higher than in other countries, which motivates traders who implement a carry-trade strategy to exchange their low-interest currencies for the New Zealand dollar. Therefore, the NZD appreciates against the US dollar, and most currencies in the Forex market.
Canada is full of natural resources, and it is a crucial exporter of fuel, oil, and other energy sources. The main destination for Canadian products is the United States, due to its geographic location, as well as the production quantity, as Canada ranks among the top 5 exporters of oil in the world.
Therefore, it makes sense to tie the Canadian dollar with the US dollar, called the “loonie”, which is backed by Canada exporting 75% of its products to the US. When the global price of oil increases, the value of Canadian exports increases and CAD appreciates against the USD.
Commodity currencies are affected by the law of demand and supply, whereby if the demand for a country’s products increases, it directly affects the exporter’s currency which increases in value against its counterparts.
There are other factors that cause the price of commodities to change, such as trade agreements, quotas, and periodic conferences. These events can directly or indirectly affect the price of commodities, either by agreeing on a unified price or limiting the production volume of a product.
OPEC meetings can highly affect the oil prices, and eventually affect commodity currencies that are based on oil such as the Canadian dollar, Norwegian krone, and the Saudi riyal. Members of this council meet twice a year to set oil price policies around the world, which can affect oil prices.
For example, in 2020 the OPEC member countries met to propose production cuts that could increase the falling price of oil. However, Russia and Saudi entered a price war, with neither country abiding by the agreement, carrying on production volume which worsened the oil prices around the world.
Additionally, the political situation can highly affect the country’s ability to produce different commodities. The Middle East is full of politically triggered conflicts, which lead to reduced production of oil and other agricultural products.
Therefore, as long as political and economic instability prevails, the prices of these commodities will fluctuate. This can also change the shape of the USD, which is the payment medium in most countries.
Those familiar with commodity trading might find it easy to trade commodity currencies, they already have an idea about the prices of commodities and how that sector works.
Therefore, they can accumulate wealth from gains in both markets, the commodity trading market, and the Forex market. However, if you are not a commodity trader, there are still several ways in which you can trade commodity pairs successfully in Forex.
Commodity currencies rely on exporting goods and products, and in the Forex market, they can be paired with any other currency. It is possible to pair two commodity currencies, for example, AUD/NZD.
However, if you trade on the AUD/NZD pair in the Forex market you may not expect significant returns. These two economies move almost in the same direction, they produce similar products, and their trade partners are also similar.
Therefore, they have a positive correlation, if both economies perform well then both currencies will appreciate. Similarly, if both economies worsen, both currencies will deteriorate.
This positive correlation does not create price parity between the currencies, which is the basis for gains in the Forex market. With most commodity currency pairs, traders use another fixed currency for pairing, such as the USD.
Unlike commodity currencies, the USD is influenced by several factors. It does not change dramatically due to just a single change, and it can be paired with any commodity currency.
Thus, before selecting the pair of currencies, you need to be able to read the commodity market and analyze the price changes and patterns. You will also need to check the correlation with other currencies like the USD, and you can add the use of indicators to check the predicted price changes.
Commodity currencies are already traded in the Forex market, not only because they are commodity-backed, but simply because Forex traders try to find the currency pairs that yield the highest returns.
The liquidity in commodity pairs in Forex depends on the currency you select. If you are including the Australian dollar, it will be easier and faster to open market positions than using the Saudi riyal for example.
Since the commodity currency pairs in Forex rely on the prices of products, the volatility rates also change between different currencies. The volatility rates increase when the prices of commodities fluctuate.
However, the volatility in commodity currency pairs is usually higher than that in major currency pairs, because NZD, AUD, and CAD are considered minor currency pairs.
Therefore, the commodity currency trading strategy in Forex needs to consider the volatility of the selected pair. It can be a shortsighted strategy because generally, the commodity market is more volatile than other financial markets like minor and exotic currency pairs.
Short-term trading strategies that you can use with these pairs include swing trading, day trading, and range trading strategies.
Using these trading strategies for commodity currencies in Forex relies on a trader executing a buy order when the price shows an upwards tick, then closing it when the trend is expected to change direction.
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Commodity-based currencies are more volatile and have high liquidity at the same time. The prices of commodities usually fluctuate, which gives some gaining opportunities for traders, and their liquidity is moderately high because many traders are involved in commodity trading.
Additionally, commodities are used as an alternative to currency in times of financial crisis, when the local economy is experiencing inflation, traders tend to buy commodity assets like gold and silver.
Australia is among the top 5 exporters of gold in the world, which creates a positive correlation between the gold price and the value of the Australian dollar.
Therefore, you can trade the pair USD/AUD, because gold is denoted in the US dollar around the world, and the Australian dollar is a commodity currency, which makes it highly associated with the price of gold.