Understanding the different types of currency pairs can help you to diversify your portfolio, gaining exposure to different markets and spreading your 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.
Lots of different factors can affect the values of currencies in the forex market. Some currencies, though, are especially sensitive to commodity price fluctuations due to their countries' wealth of natural resources and economic reliance on exporting them.
This is in part because, while many commodities are used by almost everyone around the world, their production tends to be focused locally due to geological factors.
If global demand for a certain commodity increases due to economic growth, consumer trends or other drivers, then, a linked currency will typically rise in value. Conversely, if demand falls due to economic contraction, competition or other factors, that currency may suffer.
Because of this correlation, such currencies are commonly referred to as commodity currencies. When combined with another currency in a currency pair, the pair may be known as a commodity currency pair. Not all commodity-sensitive currencies make up the small number of widely quoted commodity currency pairs however, as we cover below.
Crucially in forex, commodity currencies rise or fall in value relative to other currencies, creating opportunities to profit as a trader. To brush up on how currency pairs work and how you can trade them, check our broader guide to forex trading.
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.
These commodity dollars or 'comdolls' are each paired with the US dollar (USD) to form the three widely recognised commodity pairs. They're among the most popular pairs on the forex market, ensuring good levels of liquidity and tight spreads for more efficient, cost-effective trading.
To trade them successfully, however, you'll need to understand the different currencies and economies involved and the respective factors that drive their pricing.
The USD/CAD is the fifth most popular pair on the forex market, accounting for 5.5% of average daily volumes. It's nicknamed the 'Loonie' in honour of the loon bird featured on Canada's $1 coin. The Canadian dollar is a recognised commodity currency thanks to its correlation with oil, of which Canada is a major exporter, among other fuels and woods. Much of the country's produce flows into the neighbouring US, its primary trading partner, with the two economies closely linked.
The Canadian dollar appreciates when oil rises and depreciates when it falls, meaning that the USD/CAD pair has an inverse correlation to oil. Key triggers for price movements include various supply and demand issues, such as production quotas set by the Organisation of the Petroleum Exporting Countries, international conflicts and global economic health.
The AUD/USD sits one position behind the USD/CAD as the next most traded pair globally with 5.1% of daily average trades. It's known simply as the 'Aussie' thanks to its Australian base currency. The AUD is influenced by Australia's global iron ore and coal exports, as well as the agricultural commodities beef, wool and wheat, plus petroleum and gold. 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.
The least popular of the main commodity currency pairs, the NZD/USD makes up 1.3% of global 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. Its major export, however, is concentrated milk and cream, along with other 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.
As we briefly touched on above, there are many other countries with major commodity reserves and exports beyond Canada, Australia and New Zealand. Not all pairs have to feature the USD on one side, either.
But such pairs are usually more thinly traded, leading to low liquidity and wide spreads – two undesirable conditions for traders.
Commodity pairs can fluctuate for several reasons aside from their correlated commodities, such as monetary policy, economic data and political events, as we cover in this guide: What drives forex prices?
But there can be many unique factors affecting them relative to their correlations, such as:
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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. Trade other currency pairs as well as commodities themselves and other asset classes, including stocks, indices and crypto.