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Currency and Commodity Trading, Currencies as Commodities Proxy

When we consider currency and commodity trading it relates to the currencies of countries where a proportion of their output and exports are commodities, such as raw materials like copper, oil and precious metals and agricultural products like wheat, soybean or timber.

Clearly the currencies of a number of countries around the world could be called “commodity currencies” on this very broad definition.

For the purposes of currency and commodity trading, the term relates to three major countries where a significant contribution to exports comes from commodities.

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The Australian dollar, the New Zealand dollar and Canadian dollar are all affected by movements in the price of global commodities, with gold price movements strongly reflected in changes in the Australian dollar, while the Canadian dollar has a strong relationship with the price of crude oil.

Meanwhile the New Zealand dollar (or “Kiwi”), while not linked to a particular commodity like the other two currencies, displays a general correlation with movements in the Commodity Research Bureau (CRB) Index.

So what happens when the gold price strengthens? We will see a similar rise in the Australian dollar in the AUD/USD pair (the “Aussie”), as all currencies trade in pairs.

This means the Australian dollar is rising against the dollar, conversely the US dollar is weakening in that pair.

When investors see economic uncertainties such as rising inflation or a recession, they may move into gold for its perceived safe haven status.

Currency and commodity traders also look to the yellow metal’s link to the Aussie, possibly trading this pair as a proxy for gold.

Commodities contribute a significant proportion of Australia’s GDP and over 50% of its exports, with gold and other precious metals making a significant contribution.

Trading charts show the very positive correlation of gold with the Aussie, which means a trader can either go for trading gold in the futures market or as an ETF, or follow the AUD/USD pair in the spot forex market.

Followers of currency and commodity trading will know that Canada is a major commodities producing nation and specifically one of the world’s largest crude oil producers.

Accordingly, there is a fairly strong negative correlation between movements in the USD/CAD (the “Loonie”) pair and the price of crude oil.

Canada is the largest supplier of oil to the USA, which is the world’s largest consumer of this key commodity. So high oil prices are good for the Canadian dollar but negative for the US economy and US dollar.

Traders can go long on the Canadian dollar in the forex market if they are bullish about the price of crude oil, as an alternative to trading Nymex crude futures or oil ETF’s.

Looking at all three of these currency pairs gives currency and commodity trading followers a real opportunity to choose spot forex trading as a way of capturing the movements in the commodity markets, either for gold, crude oil or across the whole spectrum of commodities.

There is always a bull market in currency trading, it just depends which currency in the pair you are long or short.