When a country’s economy is heavily dependent on the export of a particular raw material, i.e. a commodity, the value of its currency is closely tied to the price of that commodity. Such a currency is called commodity currency. There are three such currencies – the Australian dollar (AUD), the Canadian dollar (CAD), and the New Zealand dollar (NZD). These are the currencies of countries that are among the top global producers and exporters of commodities and closely correlate with the price of the commodities.
Reports show that in the first half of 2022, the commodities market, in particular, experienced extreme volatility due to geopolitical tensions. Those who usually traded in commodities took up different trading strategies to make the most of these market conditions.
Let’s go through the different commodity currency pairs and the best ways to include them in your trading strategy.
Understanding the top 3 commodity currency pairs
1. US dollar/Canadian dollar (USD/CAD)
Canada is among the world’s top 5 oil producers and exporters, and shares a strong trading relationship with the United States (US). Nearly all of its exports go to the US, so the country earns most of its US dollar earnings through selling oil. This is why oil prices hugely influence Canada’s economy and financial health. When the price of oil rises, the Canadian dollar typically rises too
Trading tip — Compare the charts of oil and the Canadian dollar. Identify the support and resistance levels, trends, and patterns. If you see a sudden spike or dip in the oil charts that aren’t reflected in the CAD chart yet, this commodity currency will likely follow suit. Additionally, suppose your research and analysis lead you to speculate that oil prices will rise. In that case, you could place a buy trade for CAD to benefit from this potentially profitable market condition.
2. Australian dollar/US dollar (AUD/USD)
Australia is one of the largest exporters of gold and earns its revenue through gold exports. As a result, the AUD has an 80% correlation with gold prices.
China, a key contributor to global manufacturing, is Australia’s largest trading partner. China tends to prefer Australia’s natural resources over its competitors due to the quality and Australia’s proximity. This makes the Australian economy’s health heavily reliant on the prices of the commodities they export.
Trading tip — Along with keeping a close watch on the performance of gold, also stay abreast with news on China’s economic and political affairs. If China increases its demand for raw materials, Australian exports will rise, which will result in a rise in the Australian dollar.
3. New Zealand dollar/US dollar (NZD/USD)
New Zealand is the world’s biggest exporter of dairy products. It also exports meat and wool. The New Zealand dollar’s value fluctuates according to the price of these commodities, which determines the revenue the country will receive. Australia and China import vast quantities of dairy products from New Zealand, so the New Zealand dollar also depends on the economic performance of these countries and the demand that stems from them.
Trading tip — The NZD/USD and the AUD/USD are highly correlated since New Zealand is located close to Australia and exports a great deal of goods to it. Compare the price trends of the NZD/USD and AUD/USD and use this information to base your speculation.
Commodity currency pairs available to trade on Deriv
| USD/CAD, EUR/CAD, GBP/CAD, NZD/CAD |
| NZD/USD, EUR/NZD, GBP/NZD |
| AUD/USD, GBP/AUD, EUR/AUD, AUD/CAD, AUD/NZD |
When trading commodity currency pairs, research the commodities from those countries (their patterns, trends and influential factors) before placing your trade. If you are still unsure whether you want to add commodity currency pairs to your trading portfolio, practise trading them risk-free through a demo account that is pre-loaded with virtual funds.
