Lesson 11: Commodity Currencies

Commodity Currencies, Australian dollar, New Zealand dollar, Canadian dollar, AUD, NZD, CAD

Commodity Currencies, Australian dollar, New Zealand dollar, Canadian dollar, AUD, NZD, CADWith the last article you learned what are the safe haven currencies, now we will see the Commodity Currencies. The term "commodity currencies" is used to refer to the currencies, the value of which depends largely on the country's export of the commodities, such as oil, precious metals, and agricultural products.

There are several commodity currencies, but the most commonly traded in the Forex market are the Australian Dollar, New Zealand Dollar, and Canadian Dollar.

Unlike other countries that export commodities, exports of these countries are an important part of their gross domestic product (GDP) annually. As such, fluctuations in value or quantity of goods exported to these countries will have a more significant impact on the currency of the country.

Normally, then, if the price of the raw material grows, the currency of a great exporter country will appreciate more than the other ones. However, this should be considered with caution. The currencies are more complex representations with respect simply to a market linked to the price of an asset. The performance of a commodity currency can be influenced by several other factors independent of the commodities, especially in the short-term. One of these is the differential that may form between interest rates of the countries.

For example, those of Australia (or New Zealand) with those of Japan: in general, the capital will tend to move where the rates, and then the remuneration, are higher. It involves an appreciation of the country's currency exchange rate that is attracting more capital. Not surprisingly one of the most currency pairs exploited by traders is precisely Jpy-Aud, which, like that of New Zealand, is a very beaten path from the carry trade (the speculative strategy that exploits the disparities of the costs money to borrow where it costs less and invest where makes more).

Australia is the world's second-largest gold producer, after South Africa. The gold exports make up a large percentage of the GDP of the country, so the changes in gold prices will have a significant impact on GDP of the country and the value of its currency.

In the case in which the production of gold diminished, this could also have as a consequence a potential weakening of the Australian Dollar. The connection between the Australian Dollar and the value of gold is used as an important indicator for the currency pair Aud-Usd.

Australia is not only a great producer of gold but is also a major exporter of oil and copper (the latter directly connected with China). In a lesser manner, it is also an exporter of meat and grains.

So you can see well how Australia is a major exporter of commodities, in particular to China. And for this reason, the Chinese economy is connected to the Australian Dollar.

The basket of currency pairs in Forex is very wide. There are, however, very liquid currencies, the most traded, and some others which are less important from this point of view. The currency of New Zealand is inserted into the basket of the Majors, but for the trading and the importance that it has on the Forex market, it cannot be treated like other Majors.

If Eur-Usd has certain percentage movements, for a currency pair with New Zealand Dollar this percentage is much higher, it has far greater fluctuations. It means that the liquidity that goes to move is much smaller and then much more manoeuvrable. And what is much more manoeuvrable is much less controllable for us traders. So it is a most dangerous currency, more speculative, which is similar to exotic.

We try to use this currency sparingly and in any case only if we have the option to keep it under control and with fairly small investment percentages.

Exports of New Zealand relate to commodities such as timber, dairy products and meat products. The various commodity indices have proved their value in the long-term as indicators of the value of the New Zealand Dollar.

Canada Canada is oil-related since it is a large producer (is among the top 5 countries in the world, although it is not part of OPEC) and is a major exporter and therefore the oil is very important for its economy. More the price oil will grow, more the Canadian economy will improve, and thus its currency because it will get more revenue and greater profits.

The Canada supplies of oil are, above all, for the United States (with about two-thirds of exports). So, if the price of oil increases, lower is the value of the currency pair Usd-Cad.

Canada is not only a major oil exporter. Another commodity that is the object of considerable export is aluminium. Canada has also had an exponential growth in exports of other precious metals including zinc, copper and nickel.

In conclusion, you are starting to understand that currency pairs are moved not only by the traditional law "demand and supply" but also by others dynamics, one of them is the commodities.

So, fundamental or technical analysis? You will get the answer in the next article.


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