What are Commodity Currencies in Forex Trading?
Quick Answer: Commodity currencies are currencies from countries whose economies heavily depend on exporting raw materials. The major commodity currencies are AUD (Australian Dollar tied to iron ore/gold), CAD (Canadian Dollar tied to oil), and NZD (New Zealand Dollar tied to dairy products).
Understanding Commodity Currencies
Commodity Currencies are currencies from countries whose economies are heavily dependent on the export of natural resources. The three main commodity currencies in forex are the Australian Dollar (AUD), Canadian Dollar (CAD), and New Zealand Dollar (NZD).
The Three Major Commodity Currencies
Australian Dollar (AUD)
Main exports: Iron ore, coal, gold, natural gas | Heavily tied to Chinese demand | Correlates strongly with commodity prices
Canadian Dollar (CAD)
Main export: Crude oil (Canada is major oil producer) | Also exports lumber, wheat, natural gas | Moves with oil prices
New Zealand Dollar (NZD)
Main exports: Dairy products, meat, wool, forestry | Agricultural focus | Sensitive to global food demand
Why Commodity Prices Drive These Currencies
The relationship is straightforward:
- Export revenue - Higher commodity prices = more income for the country
- Trade balance - Commodity exports improve trade surplus, strengthening currency
- Economic growth - Commodity booms drive GDP growth, attracting investment
- Central bank policy - Strong economy allows higher interest rates
Key Commodity Correlations
| Currency | Primary Commodity | Correlation |
|---|---|---|
| AUD/USD | Gold, Iron Ore | Strong positive (70-80%) |
| USD/CAD | Crude Oil | Strong negative (oil up = CAD up = USD/CAD down) |
| NZD/USD | Dairy prices | Moderate positive (50-60%) |
Trading Commodity Currencies
Strategies for commodity currency traders:
Follow Commodity Prices
Monitor gold and iron ore for AUD, crude oil for CAD, dairy futures for NZD
Risk Sentiment
Commodity currencies strengthen during "risk-on" periods, weaken during "risk-off"
China's Economy
AUD especially sensitive to Chinese economic data (China is Australia's largest trading partner)
Interest Rate Differentials
Higher commodity prices often lead to rate hikes, attracting yield-seeking capital
Common Pairs to Trade
Popular commodity currency pairs:
- AUD/USD - "Aussie" - Most liquid commodity currency pair
- USD/CAD - "Loonie" - Inverse correlation with oil prices
- NZD/USD - "Kiwi" - Smaller economy, higher volatility
- AUD/JPY - Classic risk-on/risk-off indicator (carry trade favorite)
- AUD/NZD - Pure commodity currency cross (agricultural vs mining economies)
Practical Example
Crude oil surges from $70 to $85 per barrel due to supply concerns. The Canadian Dollar strengthens because Canada's oil exports become more valuable. USD/CAD falls from 1.3500 to 1.3200 (CAD gains 300 pips against USD). Traders who anticipated the oil rally could have shorted USD/CAD or gone long CAD/JPY to capitalize on this correlation.
Related Terms
Learn More About Forex Trading
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