Review Currency and Commodity Trading Techniques
An analysis of currency and commodity trading refers the keen trader to the currencies of countries whose economic output and subsequent exports are chiefly commodities, such as raw materials like aluminium, oil and gold and agricultural products like sugar, soybean or livestock.
While it would not be wrong to refer to many world currencies as commodity currencies, this is not the intention when traders use this description. Those who follow currency and commodity trading trends, however, use the term to describe the three major countries in which commodities play a major role in both economic output and exports.
A look at trading charts shows how changes in global commodity prices seem correlated to the Canadian, Australian and New Zealand dollar currencies, with the Australian dollar a very good proxy for gold price movements, and the price of crude oil price does seem to correlate closely with movements in the Canadian dollar (CAD). Unlike the other two commodity currencies, the New Zealand dollar (NZD) or “Kiwi” does not seem to be linked to any particular commodity , but rather shows a close correlation with price changes in the broader measure of Commodity Research Bureau (CRB) Index.
Let’s consider what happens as gold strengthens? We can expect to observe a similar rise in the AUD/USD pair (the Aussie), as all currencies trade in pairs. This equates to a strengthening of the Australian dollar versus the US dollar, or put it another way, the US dollar is weakening in that pair. The onset of economic uncertainty in the global economy, such as recession or rising inflation, prompts investors to move into gold as it is regarded as a safe haven. Currency and commodity traders will also see how gold links to the Aussie, and trade this pair instead.
Australia gets a significant percentage of its output from commodities and over 50 per cent of its exports are from this source, with gold, other precious metals and copper playing a big role. Take a look at trading data to see the strongly positive correlation of the Aussie and gold. This means a switched-on trader can either trade gold futures or an ETF, or gain exposure to AUD/USD in the spot forex market.
Market data will show the keen observer of currency and commodity trading the significant part played in the global commodities market by Canada, especially when it comes to its role as a strategic crude oil producer. This leads to the inverse correlation observed between crude oil price changes and the movement of the USD/CAD (the Loonie) pair.
Canada is a major oil supplier to its neighbour the USA, which in turn consumes more oil than any other economy. A low crude oil price would be bad news for the Canadian dollar, though positive for both the US economy and US dollar. Any trader bearish about the outlook for crude oil prices could as a proxy go short the Canadian dollar in the forex market, instead of going short Nymex crude or buying inverse ETF’s in oil.
Knowing how these three currencies are linked closely with commodities, we can see why currency and commodity trading observers take their chance in spot forex trading to profit from commodity market movements, whether in crude oil, gold or more broadly across the commodities spectrum. There is always a bull market in currency trading, so decide what you are long or short in your chosen currency pair.
