When we consider currency and commodity trading it relates to the currencies of countries where a proportion of their output and exports are commodities, such as raw materials like copper, oil and precious metals and agricultural products like wheat, soybean or timber.
Clearly the currencies of a number of countries around the world could be called commodity currencies on this very broad definition. For the purposes of currency and commodity trading, the term relates to three major country currencies where a significant contribution to exports comes from commodities.
Movements in global commodity prices affect the Australian, New Zealand and Canadian dollar currencies, with the Australian dollar reflecting gold price movements strongly, while the crude oil price seems to have a close relationship with movements in the Canadian dollar (CAD). Though it is not linked to any particular commodity like the other two currencies, the New Zealand dollar (NZD) or “Kiwi” shows a general correlation with price changes in the Commodity Research Bureau (CRB) Index.
So what happens when the gold price strengthens? We will see a similar rise in the Australian dollar in the AUD/USD pair (the Aussie), as all currencies trade in pairs. This means the Australian dollar is rising against the dollar, conversely the US dollar is weakening in that pair. When investors see economic uncertainties such as rising inflation or a recession, they may move into gold for its perceived safe haven status. Currency and commodity traders also look to the yellow metals link to the Aussie, possibly trading this pair as a proxy for gold.
Australia gets a significant percentage of its output from commodities and over 50 per cent of its exports are from this source, with gold, other precious metals and copper playing a big role. Take a look at trading data to see the strongly positive correlation of the Aussie and gold. This means a switched-on trader can either trade gold futures or an ETF, or gain exposure to AUD/USD in the spot forex market.
Followers of currency and commodity trading will know that Canada is a major commodities producing nation and specifically one of the worlds largest crude oil producers. Accordingly, there is a fairly strong negative correlation between movements in the USD/CAD (the Loonie) pair and the price of crude oil.
Canada is a major oil supplier to its neighbour the USA, which in turn consumes more oil than any other economy. A low crude oil price would be bad news for the Canadian dollar, though positive for both the US economy and US dollar. Any trader bearish about the outlook for crude oil prices could as a proxy go short the Canadian dollar in the forex market, instead of going short Nymex crude or buying inverse ETF’s in oil.
Knowing how these three currencies are linked closely with commodities, we can see why currency and commodity trading observers take their chance in spot forex trading to profit from commodity market movements, whether in crude oil, gold or more broadly across the commodities spectrum. There is always a bull market in currency trading, so decide what you are long or short in your chosen currency pair.
The author, William Davies, follows the commodities markets closely and pens articles for an educational Commodity trading website. Learn more about how you could gain by entering the world currency and commodity trading markets.
