Some currencies are heavily influenced by the prices of various global commodities, such as oil, gold, metals or even agricultural products. Depending on whether these commodities are major exports or imports for the countries behind the currencies, this influence may be a positive or negative correlation. Once you understand this correlation, you can easily trade such currencies on the FX market.
What are commodity currencies?
A commodity currency is one whose value moves in relation to the global prices of certain commodities, owing to the fact that said commodities constitute some countries’ major exports. These exports may contribute a substantial part of the country’s GDP, hence heavily influencing the price of its currency. Countries like Australia, New Zealand, Russia, Canada, Brazil and South Africa have commodity currencies. The performance of their currencies on the FX market is tied to the value of the commodities they export.
The most popular commodity currencies for FX traders are the Canadian dollar (CAD), the Australian dollar (AUD) and the New Zealand dollar (NZD). Another honorable mention is the Japanese Yen (JPY). Japan imports most of her oil requirements, hence rising oil prices tend to have a devaluing effect on the JPY.
Examples of commodity currencies.
1. The AUD
Australia is one of the most natural resource-rich country in the world. It is the leading exporter of coal and iron ore, and it exports considerable volumes of petroleum and gold. Therefore, the global prices of these commodities have a significant impact on AUD prices.
What’s more, Australia’s main client for her exports is China, which is the world’s largest industrial giant. The coal and iron ore of which Australia is ranked the world’s top producer, is mostly consumed by China’s industries. A survey done in 2019 found that China consumes 32.6% of Australian exports. What’s more, the minerals from Australia are of better quality than those from rivals like Brazil, and its close proximity to China only works in its favor.
Therefore, the state of the Chinese economy directly influences the value of the Australian dollar. When China’s economy is booming, they buy more of Australia’s exports, thus sending the AUD on a rally. Conversely, when China’s economy stalls, the demand for Australian exports subsides, thus devaluing the AUD.
Additionally, the global price of gold can also affect the price of AUD pairs, especially AUDUSD. Since Australia exports gold, high global prices for the precious metal drives the price of AUDUSD up. When these gold prices fall, so do those of AUDUSD.
2. The CAD
The price of the Canadian dollar and US dollar pairing (CADUSD) is heavily dependent on global oil prices. This is because Canada is ranked the fifth largest oil producer in the world, and oil makes up 10% of the country’s total exports. Its close proximity to the US, the world’s wealthiest consumer, makes Canada the supermarket for US’s oil needs. As a matter of fact, nearly 75% of Canada’s oil is exported to the US, whether in form of crude or in refined by-products.
Other than oil, Canada also exports timber and energy. However, oil is the main commodity they export, and it contributes most to the value of the CAD. If global oil prices rise, so does the value of the CAD.
3. The NZD
Due to its favorable climate, New Zealand is the world’s largest producer of agricultural products like milk products. It also exports large quantities of wool and meat. New Zealand’s primary clients for these products are China and Australia. Therefore, the value of the NZD is dependent on the state of the economy of these Asian countries.
The Reserve Bank of New Zealand (RBNZ) maintains higher interest rates than most other countries. This makes the AUD a favorable currency for carry trades, where traders buy NZD using low-yield currencies to take advantage of the interest difference.
Other commodity currencies
There are several other less-known commodity currencies from around the world, such as Saudi Arabia’s riyal which is positively correlated with oil prices. Russia too is the third largest global oil producer, and the ruble fluctuates with the global crude prices. Venezuela’s bolivar is also influenced by oil prices, as is Norway’s krone. South American countries such as Brazil, Chile and Peru export coal, gold and other minerals, which affect the value of their currencies.
Factors that move commodity currency prices
The Organization of Petroleum Exporting Countries contains 13 countries who account for 44% of the total oil produced globally, and 81.5% of all global oil reserves. They meet twice a year to discuss production quotas, and the decisions made at these meetings tend to drastically affect oil prices. Usually, these prices usually fluctuate before, during and after these meetings, so if you intend to trade commodity currencies relying on oil, you should adjust your strategy accordingly.
Political unrest in Africa and the Middle East
The Middle East region produces 42% of the global oil supply, and accounts for 10% of all known reserves. Africa also produces oil and is crucial to oil supply lines, thus any unrest in either of the two regions could have a substantial effect on oil prices.
Chinese economic data
China is the second largest consumer of oil after the US, and its economic performance can dictate global oil prices. Metrics that investors look for include China’s GDP, its export and import figures as well as its industrial output.
Commodity currencies are those whose value is reliant on the global prices of the primary commodities that make up majority of their exports. The most popular of these currencies are the AUD, which is reliant on coal, iron ore and gold, CAD, which is heavily influenced by oil prices, and NZD, which depends on agricultural products such as milk, wool and meat. To trade these currencies, traders should watch out for OPEC meeting decisions, Chinese economic data, and any news of unrest in the Middle East.