The Influence of Commodity Currencies in Forex Markets

The commodity currencies have a special place in forex trading. These currencies, correlated with oil, gold and other crude assets, give a crucial direction to the market processes. Some nations are considered to have their currencies as commodity currencies. Knowledge in their impact on the forex market is beneficial especially to the trader in search of a trade in this uncertain world.

It is a common characteristic of commodity currencies often to follow the prices of the different resources of which it is associated. For instance, the Canadian dollar, also nicknamed the ‘loonie,’ depends on the price of oil so closely. Being one of the G8 countries with a relatively large export of crude oil, Canada benefits from increasing oil prices. In forex trading this means that the Loonie has a propensity to rise in value when there is higher demand for oil and to decline when prices are falling.

Image Source: Pixabay

Likewise, the Australian and New Zealand currency is inclined towards the mineral and agriculture prices and all other exportable products. Australia has large reserves of iron ore and coal and major commodities like these make its currency volatile depending on the demands of the largest trading partners similar to the Chinese yuan. On the other hand, New Zealand, an exporter of a wide range of dairy products, has its dollar hinging on the volatile global agricultural sector. To the forex traders, these correlations afford opportunities which they can use to forecast trends that should help in trading.

Information of economic nature and geopolitical considerations are also important in the case of commodity currencies. For instance, trade relations, availability or unavailability of resources, stances of central banking institutions can exacerbate their influence. For instance, a sharp increase in demand for gold in the global market will lead to appreciation of Australian dollar while any information that closes the door to Canadian pound such as an unexpected production cut will lead to an appreciation of Canadian dollar. Trading in Forex depends on these currencies may necessitate watching the global events, and reports affecting the prices of resources.

Commodity currencies also act as barometers of overall market condition. High mobility also creates favorable sentiment in global markets whenever prices for commodities are on an upward trend. On the other hand, price depreciation may be an indication of a decline in economic activity level, or a decline in demand. Commodity currencies are invariably popular in that they are used by traders to estimate the fluctuations in the worldwide economy.

Managing the risks is crucial especially when trading commodity currencies as their exchange rates are associated with high volatility. Market sentiment can shift as a result of a changing political map, fluctuations in the availability of any particular material, or a favorable policy shift. This volatility is an advantage for trading because these currencies can be dealt with minimum risks by some tools such as stop-loss orders and keeping the investments diversified.

Global currencies which are linked to commodities makes forex trading to be slightly more interesting and lucrative. Its ties with global resource markets, economics indicators and geocentric events could be interesting for traders and analysts. Traders will be able to have a clear view of the factors that shape these currencies and a way of filtering through the challenges to tap on the opportunities that exist in the forex market.