What’s a Commodity Currency and How Does it Function in the Forex Market?

If you’re a seasoned currency trader, you’ll know that the forex market is heavily influenced by macroeconomics and the aggregate behaviour of the global economy. This means that trading currency requires a broader understanding that extends beyond forex, as you look to factor in the impact of everything from interest rates and inflation to economic growth forecasts.

Interestingly, currency prices are also linked intrinsically to the nature of a particular nation’s economy. For example, commodity-driven economies like Australia rely heavily on the natural resources that they harvest and sell, so the value of the AUD fluctuates according to the supply and demand that exists for these materials.

Such currencies are known as commodity currencies, but how exactly do they operate and what purpose do they serve in the forex market?

Exploring the Link Between Commodities and Commodity Currency

 We’ve already spoken about Australia, but Canada is another economy that has commodities at the heart of its growth.

More specifically, Canada remains one of the most prolific net oil exporters, with the nation established as the fifth-largest producer of crude oil in the world. The size of Canada’s oil reserves also ranks third in the world, and it should therefore come as no surprise that there’s a strong correlation between the CAD and oil prices.

Of course, this trend may break on a day-to-day basis, but it has remained true over an extended period of time and oil remains the single biggest influence on the price movements of the CAD. This makes the Canadian dollar a genuine commodity currency, and one that’s attractive to traders due to the presence of identifiable price shifts and trends.

If you trade through an online brokerage site like Oanda, you’ll also know that the USD/CAD pairing is one of the most popular on the market. This is partially the result of the close proximity of these two nations and their strong trading relationship; with Canada one of the most desirable places from which the U.S. imports oil.

To understand the relationship between commodities and commodity currencies further, we should consider the Japanese Yen (JPY).

After all, Japan is renowned as one of the world’s largest importers of oil, and as a result of this, there’s a marked correlation between the price of oil and the value of the Yen. Whilst the CAD loses value as oil prices full and supply begins to exceed demand, however, the Yen appreciates at the same time.

Commodity Currencies in the Forex Market – What You Need to Know

 In many ways, the CAD bucks the prevailing trend in the world of commodity currencies, with these currencies typically most widely available in developing countries.

The reason for this is simple; as these countries tend to lack the economic infrastructure of the world’s biggest countries and often leverage their raw, natural resources to drive growth. As a result of this, commodity currencies aren’t generally amongst the most traded assets in the forex market, with currencies such as the USD, EUR, and GBP dominating the landscape.

Such currencies may be desirable to seasoned commodity traders, however, particularly those who are looking to leverage their existing knowledge and supplement their portfolio with related investments.

In addition to being able to capitalise on a similar outlook, this strategy also allows traders to earn interest by holding higher interest rate currencies.