Commodity Currency Pairs
Understanding different currency pairs can help diversify your portfolio, providing exposure to commodity price movements and spreading risk. There are majors, minors, crosses and exotics, all of which pose different considerations and opportunities. But another popular type with which to familiarise yourself is the commodity currency pair.
What are commodity currency pairs in trading?
Numerous factors influence currency values in the forex market, particularly for commodity currencies. Some currencies are highly sensitive to commodity price changes due to their countries’ wealth of natural resources and reliance on exports.
The production and sale of commodities are often localized due to geological factors, despite their global use.
Commodity price movements, driven by global demand, economic growth, or consumer trends, typically cause a linked currency to rise in value. Conversely, if demand falls due to economic contraction, competition or other factors, that currency may suffer.
Currency correlations with commodities define commodity currencies, which move in tandem with specific commodity markets. When combined with another currency, these form forex currency pairs known as commodity currency pairs. Not all commodity-sensitive currencies form the widely traded currency pairs recognized as commodity pairs, as discussed below.
Commodity currencies provide exposure to commodity price fluctuations, creating profit opportunities as their values shift relative to other currencies. To understand currency trading and how to trade commodity pairs, explore our comprehensive forex trading guide.
Which forex pairs are classed as commodity pairs?
There are many currencies that are sensitive to changes in commodity markets, including the Russian ruble (RUB), Brazilian real (BRL) and lots from emerging economies. The three most popular commodity currencies, though, are the Canadian, Australian and New Zealand dollars.
Commodity pairs include pairing the Canadian, Australian, and New Zealand dollars with the USD to form the most traded commodity pairs. Among the most widely traded, these pairs offer high liquidity and tight spreads for efficient, cost-effective trading.
Commodity pairs offer trading opportunities, but success requires understanding the currencies, economies, and factors driving their prices.
USD/CAD
The USD/CAD is among the most popular currency pairs on the foreign exchange market, accounting for 5.5% of daily volumes. It's nicknamed the 'Loonie' in honour of the loon bird featured on Canada's $1 coin. The Canadian dollar is closely tied to commodity markets, particularly oil, of which Canada is a major exporter. Much of the country's produce flows into the neighbouring US, its primary trading partner, with the two economies closely linked.
A rise in oil prices increases the value of the Canadian dollar, creating an inverse correlation with the USD/CAD pair. The USD/CAD pair is correlated with oil prices, driven by supply and demand issues like OPEC quotas, conflicts, and global economic health.
AUD/USD
The AUD/USD is one of the top pairs on the foreign exchange market, with 5.1% of daily average trades. It's known simply as the 'Aussie' thanks to its Australian base currency. The Australian dollar is influenced by Australia’s global iron ore, coal, beef, wool, wheat, petroleum, and gold exports.
Price changes for iron ore and coal in particular can have significant impact on the Australian dollar's value.
As well as being a prominent commodity currency, the AUD can provide a strong insight to the health of China's economy. China is Australia's leading trade partner by some distance, with demand for Australian commodities typically increasing when China's economy grows.
NZD/USD
Though less widely traded, the NZD/USD accounts for 1.3% of global commodity currency pair trades. Like the USD/CAD pair, it's nicknamed the 'Kiwi' thanks to the Kiwi bird depicted on New Zealand's $1 coin. New Zealand is well known among international tourists for its natural resources and beauty. New Zealand’s major commodity exports include concentrated milk, cream, dairy products, meat, and wool. As such, following these markets can provide an indication of New Zealand's economic prospects and relative currency value.
The Kiwi is a popular vehicle for currency carry trades, too, thanks to the high interest rates typically in place. Investors can borrow money in low-interest-rate countries such as Japan and Switzerland and convert them into NZD to earn a higher yield.
Other commodity currencies
Countries produce and export various commodities, influencing currency pairs beyond Canada, Australia, and New Zealand. Not all pairs have to feature the USD on one side, either.
Such pairs are often thinly traded, leading to low liquidity and wide spreads, which are challenging for forex traders.
What influences the price of commodity pairs?
Commodity pairs can fluctuate due to fluctuations in commodity prices, as well as monetary policy, economic data, and political events.
Many unique factors influence commodity pairs, including their correlations with specific commodities:
- Climate and weather events can impact the prices of the commodities, affecting agricultural production and currency values. Cold can also increase energy demand, while extreme weather may disrupt the transport and storage of many commodities.
- Other production issues such as worker availability or strikes, new technology and processes, competition such as new producers or alternative commodities, and changes to state or industry policy.
- Correlations can change over time as economic growth or decline drives demand for commodities like metals or food. The rise of emerging markets such as India, Brazil and Saudi Arabia can also drive commodity demand.
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How to start trading commodity currency pairs with Tradu
1. Sign up for a Tradu trading account online in minutes.
2. Choose a commodity currency pair and study its movements, using robust fundamental and technical analysis to understand its direction.
3. Open your first position, and control risk with risk-management strategies. Monitor and close your position when you judge that the time is right.
4. Keep building your trading knowledge. Use our vast learning resources to study new markets and trading strategies and spot new opportunities.
5. Diversify your portfolio with commodity trading, alongside other currency pairs, stocks, and indices.