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What Is Commodity Currency Trading?
from:Commodity currency trading is a small section of forex or foreign exchange trading that is rather specialized but can offer great potential to the trader who takes an interest in the prices of certain commodities, especially oil and gold.
In the forex markets, 'commodity currencies' are currencies of countries whose main exports are in raw materials. As we just mentioned, the single most influential are oil and gold, but other raw materials can include metals other than gold, agricultural products, precious stones, etc.
There are a large number of countries around the world that have raw material exports of course, but many of them have minor currencies that most traders would not wish to become involved with. There are just three major commodity currencies: the Canadian dollar CAD, the Australian dollar AUD and the New Zealand dollar NZD. All of these have enough liquidity to make them interesting for forex traders.
As you might expect, commodity currency values are often closely linked to commodity prices. In the case of Canada, which is the world's second largest exporter of oil, changes in the price of oil will affect the value of the Canadian dollar. In Australia, the significant commodity export is gold. New Zealand has a wider basket of commodity exports and so the New Zealand dollar is not closely related with any one commodity but has a correlation with the CRB index, the general commodity price index.
Any of these currencies can be traded with other major currencies, either the US dollar for a major pair or another major currency for a cross pair. However, the influence of the commodity price is particularly strong if you trade a commodity currency against a country which is a major importer of the relevant commodity.
For example, in the pair USD/CAD, you have one country that is heavily dependent on oil imports (the USA) and one country that is a major exporter of oil (Canada). Clearly a change in the price of oil will have a huge impact on this particular pair.
Of course, oil is not the only factor in the economy of these countries and you also need to take account of other factors such as interest rates and the political situation. But if you have an interest in oil as a commodity then you could apply this to the USD/CAD pair with profitable results.
Another point to keep in mind when getting into commodity currency trading is that changes in commodity prices, unless they are particularly extreme, do not usually have an immediate impact. This means that small fluctuations in the price of oil will not necessarily have any noticeable effect on USD/CAD. The forex market will simply absorb short term changes. It is the longer term outlooks for the commodity price that are more likely to matter. The delay here can be useful because other things being equal, it allows the currency trader to enter the market at a good moment.
So adding commodity price movements into the equation can certainly be profitable. For commodity traders in particular, a move into commodity currency trading can prove very lucrative, if you just remember to take account of the other factors that affect the currency market.
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