The evaluation of commodity currencies reflect how today’s modern investors assign different kinds of abstract values to specific national monetary forms. For example, traders also refer to “hard” and “soft” currency, where hard currency is seen as a stable investment in the global economy as a whole, and soft currency is something experts often recommend avoiding. In a similar way, making a national currency a “commodity currency” reflects a fixed thinking about the value of that particular money, in relation to the nation’s exports. Looking at this from a net oil exporter/importer perspective, the currency pair that tops the list of currencies to trade to express a view on oil prices is the Canadian dollar against the Japanese yen. The chart below illustrates the tight correlation between oil prices (blue line) and CAD/JPY (red/green line).

Trading this pair is also known as trading the “loonie.” Canada’s proximity to the U.S. means the two economies are closely tied, which shows in the export totals, with 75% of Canadian exports going to the U.S. in 2019. As seen in Figure 3, as the demand for a commodity shifts in (less demand) the quantity decreases to q’. This decreased demand is likely to decrease GDP, as less exporting takes place, as demonstrated by the equation for GDP below.

It is also important that traders determine how they will make trades, whether in the currency, the commodity or both. Trading the Australian dollar to the U.S. dollar exchange rate is also known as trading the “Aussie.” Australia is the most abundant global coal and iron ore exporter. Australia also has extensive areas of lush natural landscapes and is one of the most resource-rich nations in the world.

Other currency commodity relationships can be found by looking for major producers of any export, as well as the major importers of the same commodity. The currency cross rate between the exporter and importer is worth looking at for a correlation with the commodity. While Australia was among the smaller volume oil exporters in 2009, throughout 2010 the AUD/USD was also positively correlated to oil prices, and then in September diverged. Yes, a commodity currency generally refers to the currency of a country that relies heavily on the export of commodities, such as energy resources, metals, or agricultural products. Commodity currency pairs are forex pairs that involve at least one commodity currency.

Traders need to take into account commissions and spreads, additional fees, liquidity and also access to information. Currencies and commodities that are heavily traded will be easier to find information on, will have smaller spreads and liquidity that is more likely to be adequate. As these currencies tend to be highly sensitive to commodity price fluctuations, they can provide valuable insights into the health of the global economy and the demand for essential goods. Safe-haven commodity currencies are those that investors turn to in times of wider-than-normal market expectations or market volatility. A commodity currencies basket is a collection of currencies from countries that are major commodity exporters. Investors/traders often consider commodity currencies when making decisions in the equity market.

  1. So if you were to own a Canadian stock as a non-CAD investor with no FX hedge, you’re also making a bet on oil prices considering Canada is an oil exporter and that influences the value of its currency.
  2. The currency cross rate between the exporter and importer is worth looking at for a correlation with the commodity.
  3. Countries are specifically exempted in U.S. law from being legal tender for the payment of debts in the United States,[11] so that a seller who refuses to accept them cannot be sued by the payer who offers them to settle a debt.
  4. On a day-to-day basis, the correlation between oil and the Canadian dollar may break, but over the long term it has been strong, because the value of the Canadian dollar has good reason to be sensitive to the price of oil.

Some examples of commodity currencies include the Australian Dollar (AUD), Canadian Dollar (CAD), New Zealand Dollar (NZD), Norwegian Krone (NOK), Russian Ruble (RUB), Brazilian Real (BRL), South African Rand (ZAR), and Chilean Peso (CLP). These currencies are often more volatile than those of developed economies due to various factors, including political instability, lower liquidity, and weaker economic fundamentals. The proximity of New Zealand to Australia makes Australia a preferred destination for exported New Zealand goods. Therefore, the strength of New Zealand’s economy is closely tied to that of the Australian economy, which explains why the NZD/USD and the AUD/USD also share a high positive correlation. This process of funding investment by borrowing from a low-yielding country to invest in a higher-yielding country is called the currency carry trade.

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If the production and export of these commodities are disrupted due to climate policy, it can cause a decline in their prices. This can lead to a decrease in the value of commodity currencies, as the demand for these currencies falls. A strong commodity currency can be an indicator of a healthy economy, leading to increased investment in equities within the country. For seasoned commodity traders, it may also be worthwhile to look at trading currencies as an alternative or supplement to trading commodities. In addition to being able to capitalize on a similar outlook (higher oil, for example), traders may also be able to earn interest by holding higher interest rate currencies. New Zealand is the world’s biggest exporter of concentrated milk and also exports other dairy products, meat, and wool.

While the correlation is not perfect, major up moves in oil (blue) are typically followed by a rise in the CAD/JPY, and declines in oil are typically followed by declines in the CAD/JPY. Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, the best investments we can find retirement, insurance, and financial planning. Radford documented the way that this ‘cigarette currency’ was subject to Gresham’s law, inflation, and especially deflation. There are several actions that could trigger this block including submitting a certain word or phrase, a SQL command or malformed data. The following chart shows the CHF/USD (inverted USD/CHF; red/green line) to the price of gold (blue line).

Types of Commodity Currencies

Due to the slightly delayed impact of these movements on the currency market, there is generally an opportunity to overlay a broader movement that is happening in the commodity market onto that of the currency market. It never hurts to be more informed about commodity prices, and how they drive currency movements. While the correlations (positive or negative) can be significant, if forex traders want to profit from them, it’s important to time a “correlation trade” properly. There will be times when a relationship breaks down, and such times can be very costly for a trader who does not understand what is occurring.

New Zealand has a solid connection to gold and will react to movements in the commodity’s price. Trading the New Zealand dollar to the U.S. dollar (NZD/USD) is also known as trading the “kiwi.” Also adding to the liquidity of commodity pairs is the stability of their economies, which back the currencies. These characteristics make commodity pairs attractive to traders who want to have the potential for profits while moving in and out of trades quickly. As a result, its economy is impacted by the price of gold and how much it can export. New Zealand is a major trading partner with Australia and is thus highly susceptible to fluctuations in Australia’s economy.

Commodity Currencies

Oil prices tend to be the leading indicator for CAD/JPY price action, often with a delay. Long after gold coins became rare in commerce, the Fort Knox gold repository of the United States functioned as a theoretical backing for Federal Reserve. Between 1933 and 1970 (when the U.S. officially left the gold standard), one U.S. dollar was technically worth exactly 1/35 of a troy ounce (889 mg) of gold. Upon knowing which currencies and commodities have strong https://www.forexbox.info/what-is-the-best-automated-trading-platform/ relationships, traders need to decide which tradable currency pair they will make their trades in, or if they will trade in the commodity and currency. This will depend on several factors including fees and the trader’s ability to access a given market. If you want to trade commodity currencies, the best way to use commodity prices in your trading is to always keep one eye on movements in the oil or gold markets and the other eye on the currency market.

If you’re making 7% per year on the financial asset, but the currency is falling relative to your domestic currency by more than 7% per year, you’re losing money. In a separate article, we looked at the influence of a country’s current and capital accounts on the value of its currency. They are global reserve currencies (to varying degrees) and often act as reference currencies in FX pairs.

Commodity currency

This type of currency is different from fiat money, which has no intrinsic value and is not backed by a physical commodity. A commodity-backed currency is a currency that is directly pegged to the value of a specific commodity, such as gold or oil. These currencies serve as an important link between the global demand for commodities, the supply chains of them, and the economic health of resource-rich countries. If you’re a commodity trader looking for a bit of a change, commodity currencies such as the AUD/USD and CAD/JPY provide opportunities worth looking into.

Being aware of a correlation, monitoring it and timing it are crucial to successful trading based on the inter-market analysis provided by examining currency and commodity relationships. A commodity currency is a form of money that enjoys a close relationship with the value of a particular commodity. Investors look at commodity currencies as national currencies that are closely tied to price changes for a commodity that happens to be https://www.forex-world.net/blog/tech-stocks-to-watch-top-10-tech-stocks-to-buy-for/ a majority export of the nation in question. Commodity currency trading offers the investor the chance to make a play on specific commodities indirectly through the holding of a foreign currency. Figure 5 shows the weekly CAD/JPY as well as the correlation indicator (15 periods) comparing it to oil futures. Much of the time the indicator shows a strong correlation in the 0.80 area, yet there are times when the correlation falls off.

The country also exports petroleum and gold, and its currency is, therefore, heavily dependent on these commodity prices. Besides being a commodity currency pair, Australia also provides investors with insight as to how well China’s economy is performing since China is the largest export customer of Australia. If Australia is increasing its exports to China, it’s reasonable to conclude that economic growth is picking up in China. A strong Chinese economy bodes well for the rest of the world as well as Australia, which can increase the Australian dollar exchange rate due to the increase in demand for Aussie goods. Commodity pairs offer benefits to investors because they are among the most widely traded currency pairs on the foreign exchange (FX) market.