Forex education

Chapter 18. Commodity currencies on Forex

As we have already found out from previous chapters, the currency price is determined by a great variety of factors, such as: economic, political and some others. All listed factors concerning each country separately influence its national currency in its way - some of them more and some less. But on Forex, there are currencies, the prices of which are mainly determined by one factor – the country’s exports. Such currencies are termed commodity currencies on Forex.

The special feature of commodity currencies is that the economies of these countries are based on exports of raw materials – oil, gas, metals, and agricultural commodities. There are lots of countries whose currencies suit this definition. The most advanced export-reliant economies are Canada, Australia, and New Zealand. As the currency of these countries is the dollar (local in each country), it is common to call them commodity dollars or comdolls. The fact that commodity exports are the main factor of economic welfare for these countries, their national currencies rise in value whenever commodity prices increase, and vice versa. That is why experts point out correlation (interaction) of the oil price in the global market with commodity currencies.

The Canadian dollar (CAD), Australian dollar (AUD), and New Zealand dollar (NZD) are among the most traded currencies on Forex. So, understanding of their specifics as commodity currencies will certainly contribute to successful trading in the currency market. Now, let’s consider each commodity currency separately and give comments for each of them.

Canada is famous for its second biggest oil reserves after Saudi Arabia. Oil is called “black gold” that means a high demand for this commodity in the world arena. Therefore, due to its advantageous location, Canada appears to be the major oil exporter in the world. The USA is in short supply of this resource being Canada’s major importer. Hence, oil price fluctuations mirror the USD/CAD pair’s rate in the reverse proportion. The oil price growth pushes USD/CAD down amid the Canadian dollar’s appreciation. There is inverse correlation between the oil price and the USD/CAD rate. Since January 1988, analysts have logged more than 68% of inverse correlation between the oil dynamic and USD/CAD – it is rather strong interrelation! If you know this fact, it will help you a lot in forecasting a dynamic of USD/CAD on Forex.

Australia’s economy mostly depends on refined gold exports which account for more than 50% of the country’s exports. This happens due to gold fields which Australia has at its disposal because of its geographical position. The global price for gold and the AUD/USD rate has stronger correlation than the oil price and the USD/CAD pair. From January 1980 to 2006, fluctuations of AUD/USD and gold prices were almost equal. Besides, there was a tendency that the gold trend reversal preceded the AUD/USD trend reversal. In 2005/2006, the correlation changed when the gold price surged while there was no uptrend of the Australian dollar versus the US currency. Nevertheless, the correlation remains in the long term and can be used as an additional forecast instrument on Forex. You should know that the global price of gold and AUD/USD have direct correlation.

New Zealand’s economy mostly depends on exports as well as its western neighbor. But in contrast to Australia and Canada, no certain type of raw materials dominates in New Zealand’s exports. The country supplies dairy goods, meat, fish, wood, wool, etc. Due to such a great variety of sold raw items, the Commodity Research Bureau Index (CRB Index) is used to determine the correlation between the exported commodities prices and the national currency rate against the US dollar. This index involves the major commodities and appears to be the inflation growth indicator in the world. The CRB Index value and NZD/USD have direct correlation. This knowledge can simplify analysis and forecasting on Forex.

To sum up, it is better to take into account the correlation between commodity prices and commodity currency rates on Forex only in a medium and long term. Besides, remember that exports are just a part of a commodity-dependent economy. Making a decision about opening or closing a position with commodity currencies on Forex, make sure you are aware of other factors influencing the country’s economy, such as: refinancing rate, political situation in the country, etc.

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