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Advantages of Commodity Currencies Trading
Written by: PaxForex analytics dept - Wednesday, 06 June 2018 0 comments
Currencies of countries that rely heavily on the export of commodities are often referred to as commodity currencies. An important factor that any forex trader should consider is that the value of commodity currencies usually rise and fall in tandem with the value of the country's main commodity exports. Both the value of the commodity and the country's trade balance, with respect to the commodity, are significant factors in the valuation of commodity currencies. The most commonly traded commodity currencies are those of Canada, New Zealand and Australia.
While other countries export commodities as well, the exports of these three countries make up a larger proportion of their annual Gross Domestic Product (GDP). As such, fluctuations in the value or quantity exported of commodities in these countries will have a more significant impact on the country's currency. Forex traders often trade these commodity pairs to gain exposure to commodity (especially oil) volatility. Although there are many countries with large natural resource and commodity reserves, such as Russia, Saudi Arabia and Venezuela, the commodities of many of these nations are usually highly regulated by their domestic governments or are thinly traded.
Most commodity currencies are regulated by governments and not traded on the market enough. That is why only three currencies are highly used in the international forex market: the CAD, the AUD, and the NZD. They are liquid and freely floating. The peculiar feature of these currencies is that their exchange rates are highly influenced by the market’s risk sentiment
in general and the dynamics of exports in particular. These currencies tend to strengthen when the world economy is expanding and the demand for resources. It happens as these countries get higher income from selling the expensive commodities.
Commodity Currencies are expected to get stronger during strong economic growth periods due to the increased demand for the raw materials they produce and export. One of the main reasons is that importing companies must go in the forex market and sell their home country’s currency to but the exporting country’s currency in order to facilitate payment of the purchase of the raw materials. This is repeated many times over from many importers causing the exporting currency (Commodity currency) to get stronger over time.
Upon knowing which currencies and commodities have strong relationships, traders need to decide which tradable currency pair they will make their trades in, or if they will trade in the commodity and currency. This will depend on several factors including fees and the trader's ability to access a given market. Although the commodity currencies typically move in tandem with commodity prices, the currencies are also influenced by additional, unrelated factors. These factors can prevent commodity currencies from being a "pure play" on commodity prices. Therefore, individuals interested in commodity exposure should carefully consider whether they want to trade the commodity currencies or would prefer to invest directly in the commodities themselves.