Commodity Currencies

In this crazy trading world some Currencies are known as commodity Currencies, as they depend heavily on the export of certain raw materials for income. In simple words a commodity currency is a currency whose country’s exports are largely comprised of raw materials (Precious Metals, Oil, agriculture, etc.). Today the most active traded Currencies are the Canadian Dollar, Australian Dollar, South African Rand and the New Zealand Dollar.(Do not mix UD Dollar,Yen, Euro or Pound here as we are talking of commodity Currencies only). As the Currencies of New Zealand, Australia and Canada is Dollar are all called Dollars, they are also known as the commodity Dollars or “Comdolls” for short. These three Currencies are among the major currency pairs, which mean they have great liquidity and volatility for active trading.

Let us have a concise look on above mention commodity Currencies

Canadian Dollar: Canadian Dollar is normally abbreviated with the Dollar sign $, or C$ to distinguish it from other Dollar-denominated Currencies. It is divided into 100 cents.

Australian Dollar: Australian Dollar is the currency of the Commonwealth of Australia. It is abbreviated with the Dollar sign $. A$ or AU$ is often used informally to distinguish it from other Dollar-denominated Currencies. It is subdivided into 100 cents.

New Zealand Dollar: New Zealand Dollar is normally abbreviated with the Dollar sign $, or alternatively NZ$ inorder to distinguish it from other Dollar-denominated Currencies. It is divided into 100 cents. It is one of the 16 most traded Currencies in the world.

The South African Rand: The South African Rand is the currency of South Africa. The rand has the symbol “R” and is subdivided into 100 cents, symbol “c”.

Can Currency Moves Predict Commodity Prices?

Currencies have remarkably robust power in predicting future global commodity prices. Commodities represent a significant portion of exports from these Currencies’ countries, so when prices move it can have an outsized effect on their economic wellbeing. Rising commodity prices benefit their economies, making their Currencies more attractive; falling commodity prices do the opposite. But the economists found that the Currencies, rather than merely responding to commodity price movements, anticipate them. This may be because Currencies are forward-looking, with their values depending on economic expectations. On the contrary commodity prices are more dependent on changes in current conditions.

Let’s have a look at the major commodity Currencies and see how much their movement correlates to certain commodities…

Canadian Dollar And Oil
Crude Oil, popularly known, as “Black Gold” is the lifeblood of the industrialized world is the highly watched traded commodity. Countries that produce Oil hold massive reserves of Oil tend to benefit from rise in its prices, including Canada.
Canada is one of the world’s largest producers of Oil after Saudi Arabia and holds Oil reserves, which makes Canada very reliant on its most prized commodity. Moreover, it is also the largest supplier to the world’s biggest Oil consumer – the United States. Because Oil is such a big part of the US economy, rising Oil prices tend to have a negative affect on Dollar. Therefore, knowing what type of movement to expect in the Canadian Dollar if Oil prices drop, for example, will definitely help us to make smarter decisions.

Australian Dollar and Gold

Trading in the Australian Dollar is just like trading Gold. Luckily, Australia is one of the world’s largest producers of Gold and its exports comprise over 50% of commodities, including other precious metals.
The price movement of Gold as well as other markets has the large impact on this commodity currency, which influence the direction of the Australian Dollar.

Short-term moves in commodities usually do not directly affect a commodity currency immediately. Analyzing commodities for use with Currencies is probably best suited for longer-term outlooks, trading, and investing.

Commodity Prices And Currency Movements

Movement prediction of Currencies in the markets is the key to make money in trading – but putting this simple concept into action is much harder than it sounds. The fact is that Currencies are moved by many factors say supply and demand, politics, interest rates, economic growth, and so on. More specifically, since economic growth and exports are directly related to a country’s domestic industry, it is natural for some Currencies to be heavily correlated with commodity prices.

In the month of May 2008, Oil and Gold set record highs and were two of the biggest drivers of currency movements. In fact, USD Dollar reacted very differently across various Currencies simply because of that particular currency’s correlation with commodity prices as well as the slow down of the economy.

Conclusion
If any investor want to trade commodity Currencies than the best way to use commodity prices in trading is to always keep an eagle eye on the related commodities and the other eye on the currency market, watching how quickly it responds. Due to the slightly delayed impact of these movements on the currency market, there is generally an opportunity to overlay a broader movement that is happening in the commodity market to that of the currency market. Bottom line, it never hurts to be more informed about commodity prices and how they drive currency movements.