Commodity Currency Trading

Commodity Currency Trading

The term “commodity currency” is used to refer to the currencies whose value depends largely on the country’s export for raw materials such as oil, precious metals and agricultural products. There are a number of commodity currencies but some of the most commonly traded in the forex market include the Australian Dollar the Canadian Dollar and the New Zealand Dollar. These 3 currencies are also referred to as the commodity dollars or “comdolls”.

How Do Commodities Affect The Value Of Commodity Currencies?

Canadian Dollar. In an industrialized world such as ours, oil is vitally important. It is used to fuel machines which are then used to produce many of the goods we use in daily living. It is used as fuel for transportation. To denote the importance of oil, it was dubbed as “Black Gold”. Countries controlling the reserves of this precious commodity will benefit (or lose) depending on the direction prices will take.

Canada is considered the 2nd largest exporter of oil in the world, second only to Saudi Arabia, hence its currency is reliant on this commodity. It also supplies the world’s biggest oil consumer – the United States. Because the US is largely dependent on oil, the rise and fall of the commodity will have an effect not only on the Canadian Dollar but also on the US Dollar – the higher the price of oil, the higher benefits Canada gets, and the more disadvantaged the US becomes. In currency exchange, the higher the oil prices are, the lower the USD/CAD value will be.

Australian Dollar. Of all the precious metals discovered, gold remains the favorite. Because of its unique qualities, it is used in a number of applications – from jewelry, dentistry, reflective coating and even conductive wiring! In terms of investment, gold is often the asset of choice in times of inflation and economic crisis. It is a highly traded commodity and it never loses its value.

A large portion of the Australian GDP is accounted for by the rise and fall of gold prices. The country is considered as one of the biggest producers of gold and 50% of its exports are comprised of gold and other precious metals. The connection between the Aussie and the value of gold can be seen in a number of charts, hence, it is used as a leading indicator of the AUD/USD currency pair.

New Zealand Dollar. Unlike the first two commodity currencies, the Kiwi is not dependent on one commodity because its basket of commodities is really diverse. It offers a number of agricultural products to the world, and is one of the top exporters of milk, meat and even fruits. Since 1990, the correlation between the NZD/USD pair and the Commodity Research Bureau Index (CRB Index) is at 60-63%.

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