A commodity currency is a currency associated with a country whose exports mainly consist of raw or unprocessed materials – oil, metals, agricultural products, etc.

Gold and the Aussie
The classic example of a currency and commodity marriage is the Australian Dollar AUD and Gold. Some would say that trading in the Australian Dollar is little more than trading gold. They’d be wrong, but not too far wrong.

Australia is one of the largest gold producers in the world – and 50% of Australian exports are commodities. In the financial world, gold is viewed as a safe heaven against inflation, recession, all the bad things, and it is one of the most highly traded commodities.

Simply because many traders keep a close eye on the gold price in relation to AUD, means that it’s possible to go with the flow they create. Even if it wasn’t there before, their actions have made it so, self-fulfilling…

Here’s a monthly chart showing the comparison between that compares the gold price with that of AUD/USD over a period of two and a half decades.

As you can see immediately, there’s a marked correlation in the long-term trends. If anything, the gold price appears to act as a leading indicator of AUD/USD trends, with several highs and lows in its price being replicated relatively shortly afterwards in the currency pair.

If your broking platform hasn’t got the option to trade in gold directly, the correlation between AUD/USD and gold means that you can have the next best thing.

The Canadian Dollar and Oil price
Canada is one of the largest producers of oil in the world and its reserves form a large part of the country’s notional wealth and therefore the strength of the Canadian dollar.
It’s also the most important supplier to the largest oil consumer in the world, the US.

As we all know, oil is a massive part of the US economy. Any rise in oil price has a significantly negative effect on USD and US markets – while a rise in oil price will boost the strength of the Canadian Dollar. So, yes, USD/CAD and the price of crude show an inverse correlation – oil goes higher, USD/CAD tends to go lower and vice-versa.

Conclusion
The most prominent commodity currencies are the Australian, Canadian and New Zealand dollars – the commodity dollars, or the ‘comdolls‘ for short.

Looking at commodity indices do give a clearer picture as to currency movements and they have their place in any fundamental analysis of the forex currency pair market.

These tend to be long-term effects – a short-term move in a commodity has to be large for it to have any immediate effect on the currency associated with it. Don’t expect to be able to work with these ideas directly if you’re a day trader.

But with the leverage and liquidity advantages available in spot forex trading, currencies can be an alternative to trading commodities directly – or indeed hedging commodity investments.

Nearly done – all that’s left is to decide is 20. Your Own Forex System →