Commodity currencies on Forex

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A commodity currency is the currency of a country whose exports are mainly represented by raw materials: oil, gold, grain, and so on. 

There are a number of countries on the planet whose currencies are called “commodities”, but there are several of the most traded currencies on Forex:

  • New Zealand dollar – NZD 
  • Australian dollar –AUD 
  • Canadian dollar – CAD 

These currencies are included in the basic forex pairs, so they are characterized by high volatility and liquidity. In addition, the name of these currencies includes the word “dollar”, they are also called ” raw dollars “.

The pattern in Forex is simple: the influence of raw materials on the commodity currency is direct, that is, when the price of oil or gold rises, the rate of the commodity currency rises, and vice versa.

Next, we will consider the key commodity currencies and how the price of certain raw materials affects their rate.

Australian dollar and gold

In the field of finance, gold (Gold) is considered as an anti-inflationary financial instrument in various crises, so to speak, a refuge. Besides, gold is a very popular instrument of many market players.

Gold accounts for more than half of Australia’s exports, which has a very significant effect on GDP indicators.

Below you can see a comparative chart of the forex pair AUD / USD and gold (green chart – AUD / USD pair, blue chart – gold) for the period from 2000 to 2012. The chart shows that when the price of gold rises, the Australian grows and vice versa. The percentage of coincidence (this is called correlations) between the Australian dollar and gold is over O.8. This means that over 80% of the time, AUD / USD and gold go in the same direction.

Figure, click to enlarge:

 

Canadian dollar and oil

Oil is the main industrial resource of all countries of the planet, no matter how sad it is for the planet itself. In terms of production and oil reserves, Canada ranks second after Saudi Arabia. In addition, Canada is the largest supplier of oil to the world’s largest economy, the United States.

“Black gold” for the Canadian economy is a significant part of the country’s budget revenue. There is another point: oil is a significant part of the US economy, too, so the rise in oil prices is beneficial to Canada, but not beneficial to the United States, and vice versa. This means that with the rise in oil prices, the value of the Canadian will rise, and the value of the US dollar will decline.

Below you can see a comparative chart of the USD / CAD forex pair and oil (green chart – USD / CAD currency pair, blue chart – oil) for the period from 2000 to 2012

 

On the chart, you can see that as the oil price rises, the USD / CAD currency pair decreases and vice versa. The percentage of coincidence (correlation) between Canadian and oil is over 0.8. This means that more than 80% of the time USD / CAD and oil go in different directions.

New Zealand dollar and raw material prices

Just like Australia, New Zealand’s economy is dependent on the export of raw materials. It is difficult to single out one commodity whose price movement would be dependent on the movement of the New Zealand dollar. Although the price charts for the New Zealand currency and for raw materials in general are closely related.

Therefore, the rate of the forex pair NZD / USD correlates very strongly with the rate of the Commodity Research Bureau Index (CRB Index). This index indicates the level of world inflation and in which all the goods exported by New Zealand are collected.

Below you can see a comparative chart of the NZD / USD pair and the CRB Index (green chart – NZD / USD pair, blue chart – CRB Index) for the period from 2003 to 2012:

On the chart, you can see that with the growth of the CRB Index, the NZD / USD currency pair grows and vice versa. The percentage of coincidence (correlation) between NZD / USD and the CRB Index is over 0.75. This means that more than 75% of the time the NZD / USD and CRB Index go in different directions.

Figure, click to enlarge:

Impact of the financial crisis on commodity currencies

The correlation between the Canadian dollar (CAD) and oil (OIL) is about 80%, but recently this relationship has become less strong and complex, and recently, the Canadian dollar is increasingly insensitive to significant changes in oil prices.

Until 2008, the correlation between gold and the Australian dollar was traced very well – at first, the price of gold changed, and a little later, the rate of the AUD / USD currency pair turned in the same direction. In this case, gold prices act as a predictive signal. However, after the crisis, gold has appreciated significantly faster than the Australian dollar, thereby reducing the correlation.

It is necessary to take this fact into account when performing trading operations or generating forex forecasts , and also not to rely solely on correlations.

 

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