Have you heard the term commodity currencies?
Those of you who have not come across this term yet are likely to read it rather soon as you educate yourself more about forex trading and broaden your knowledge. This term is a very popular and accurate term to describe a group of currency pairs which every forex trader needs to be aware of and understand as it will result in an increase in profits as you understand what impacts them.
What are commodity currencies?
Commodity currencies are currencies of economies which are heavily dependent on commodity exports to fuel economic growth. The commodity sector is either the largest contributor to GDP growth or one of the key contributors. This makes the commodity sector a crucial component to understand when trading those currencies. There are only a handful of commodity currencies, and therefore only a handful of currency pairs, which you can trade freely and without any problems.
Which are the commodity currencies?
The three biggest commodity currencies you need to be aware of are the Australian Dollar, the Canadian Dollar and the New Zealand Dollar. The Australian economy and the New Zealand economy are heavily dependent on natural resources which are used to ‘build’ the global economy while the Canadian economy is heavily dependent on its energy exports as well. Therefore the above three currencies are knowns as commodity currencies.
What are commodities?
Commodities refer to anything that can be mined or extracted, also known as hard commodities, or anything grown and harvested, also known as sift commodities. In the case of our three big commodity currencies they are all heavily dependent and influenced by hard commodities such as basic resources, copper, iron, etc., and energy, oil, natural gas, etc. There are other commodities which play an important role on top of them as well, but to a lesser degree.
What does this mean for forex traders?
This means that when you analyze currency pairs such as the AUDUSD, NZDUSD, AUDNZD, AUDJPY, NZDJPY, USDCAD or CADJPY you need to also be aware of how commodity prices are performing, for example the sharp drop in the Canadian Dollar was boosted by the drop in oil prices, in order to get a better trading picture. In addition China can heavily influence the Australian Dollar as well the New Zealand Dollar due to their big imports of basic materials.