An Introduction to Forex Commodity Currencies

Just as futures traders benefit from the price fluctuations of raw materials and metals by trading them, forex traders can also profit by trading commodity currencies, as they often move in conjunction with certain commodity items like gold and oil.

In general, commodity currencies refer to a currency whose value is affected, positively or negatively, by the fluctuations in price of a commodity. The item itself vary widely, and encompass a whole range of products from precious metals (gold, platinum, silver etc) to agricultural (wheat, sugar, barley etc) and oil.

Of course a lot of currencies are one way or another affected by the aforementioned items, but for the forex trader the currencies to watch out for are the Australian Dollar (AUD), Canadian Dollar (CAD) and the New Zealand Dollar (NZD). When paired with the U.S Dollar (USD), these currencies can translate to profits or losses for a forex trader.

For the Canadian Dollar, the most important commodity is oil. As any oil producing country, the CAD is affected by the movement of prices, its value going up or down along with the product. When it comes to the USD/CAD, the higher the oil price, the stronger the CAD and the lower the value of the U.S. Dollar; if the reverse were to take place, then the values would contrast.

Gold is to the Australian Dollar what oil is to the CAD, so if you are holding AUD, keep an eye out for the price of this precious metal. Australia is a gold producing and exporting nation, and so the value of the metal positively correlates with its currency.

When paired with the USD, the same pattern can be seen as with the USD/CAD, and perhaps even more so, as gold negatively correlates to the U.S. Dollar.

Another commodity currency worth looking into is the New Zealand Dollar. The situation with the NZD is unique in that it does not correlate with any specific product but rather positively correlates to commodities in general. What this means is that the Kiwi currency moves up or down alongside commodity indices.

If you decide to trade commodity currencies, there are a number of things that you have to keep in mind. First is that the correlation between a commodity and a forex currency does not work all the time; for instance, a sharp decline of the U.S. Dollar may cause gold to jump higher in value much more than the AUD. The same with oil, which we all know is very sensitive to geo-political tensions.

Also, bear in mind that relying on prices to determine the direction of a forex commodity currency is not enough; you should also heed economic news and apply fundamental analysis to give you a clearer picture. As with all things in the forex, integration of tools and skills is the key.