In one of the first articles (‘the power of Forex’) we analyzed how currencies influence other assets such as commodities. Today we introduce the term of commodity currencies and explain what they are and how they move.
The term commodity currencies are currencies with essentially two features: the close correlation with changes of price of certain raw materials and the fact to have a floating exchange rate in a sufficiently liquid market.
The economic activities of many countries in the developing world are based on the production and export of a limited number of raw materials. However, countries commonly peg their currencies to the currencies of others, most often the U.S. dollar or the euro. As long as the anchor (PEG) holds, they achieve higher levels of financial stability.
If trader’s goal is to exploit to his advantage the trend of the commodity to operate on the currency market, then it will necessarily have to opt out of those free coins to adjust its exchange rate on other main currencies: euro, pound, yen and of course, the US dollar.
Among the commodity currencies there are: the Canadian dollar, the Norwegian krone, the ruble (associated with the oil price), the South African rand, the Australian dollar (influenced primarily by gold) and the New Zealand dollar.
Normally, the exchange of commodity currencies is affected in this way: if the price of the raw material grows, the currency of the state which is an exporter will appreciate against other currencies.
The trend of commodity currencies may be affected by a number of other independent factors from raw materials, especially in the short term. One of these factors is the differential between interest rates among countries; the capital will tend to move where the rates, and then the profit, are higher.
This involves an appreciation of the country’s currency exchange rate that is attracting more capital. Not surprisingly one of the most exploited by traders cross is precisely yen / Australian dollar, which, like New Zealand, is very used in carry trades (the speculative strategy that exploits the disparities of the costs money to borrow when costs less and invest when it is more).
Commodity currencies most traded among those listed above are mainly three: the dollar of Australia, New Zealand and Canada.
Among the countries with a flexible exchange currency and huge number of the reserved oil exports there is Canada. In 2014 crude oil represent the 19% of exports for the Canadian economy. In this case, unlike those of Norway and Russia, it should be noted that the main destination of exports is one: the United States, which absorbed the 74% in 2014. In order to develop a proper strategy, traders must observe also what happens in the US economy.
In Australia, we need to consider: gold and the price of iron ore. These two commodities are respectively 6.7% and 25% of Australian exports. According to a study, the correlation between gold and the Australian dollar is an increase of one percentage point on the price of gold, resulting in a nominal appreciation of the AUD against the US dollar by 0.5%.
In New Zealand, finally, the biggest share of exports consists of a category of very different products such as dairy products. Talking about correlation with the gold, its production is independent from the country, but 16% of New Zealand’s exports of gold go to Australia. Because of the interdependence of the two economies between the kiwi and the Aussie dollar there is a positive correlation of 96%.