Investing > Complete Guide to Commodity Currencies

Complete Guide to Commodity Currencies

National economies depend on exports and imports. Learn how to leverage that knowledge to make better forex trades.

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Updated January 10, 2022

All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.

It takes money to make money. Right?

Well, kind of…

You’ve probably heard that classic phrase before—and in the forex market, it can have an even deeper meaning. We take our hard-earned money, and invest it in other kinds of money, in order to make more money. It’s like a playground of cash! 🎡

Now, the value of money can change in the market for unclear reasons—but often, if you look closely, you’ll find an explanation for why this value changes. And once you know what to look for, you can start using this knowledge to your advantage. 

One example is commodity currencies. Once you understand how commodity prices affect currency, you’ll be able to read global trends to help you predict changes in the forex market. That means you’ll be able to make more successful trades, earn more profit, and finally get that beach house (or whatever you’re dreaming of). 

While the US dollar bides its time in the market, work on understanding commodity currencies and using them to your advantage. In this guide, we’ll explain what exactly a commodity currency is, how it works, and the major pairs that you should know about. By the end of this guide, you’ll be ready to hit the forex market with new knowledge—and make a buck or two.

What you’ll learn
  • What is a Commodity Currency?
  • How Commodity Currencies Work
  • Major Commodity Currencies
  • Other Commodity Currencies
  • Commodities vs. Commodity Currency
  • Conclusion
  • Commodity Currencies: FAQs
  • Get Started with a Broker

What Is a Commodity Currency? 📖

So you’ve already started trading currencies, and you want to get even better at it. Commodity currencies will help you predict currency fluctuations. Before you open a position on any pair, you should understand how a currency’s national economy works, and some economies are linked closely to their imports and exports—mostly in stuff like oil, gold, raw materials, lumber, etc.

A commodity currency is a currency in forex that comes from a country with large reserves of some specific valuable item, or commodity. This country’s currency value is very closely linked to the price of that commodity since so much of their economy is based on producing and exporting that item. 

Let’s take an example. Say you make lemonade. It’s a small business: just you, your stand, and your helpful dog assistant. (Okay, this example takes place in a Saturday morning cartoon.)

If the price of lemonade is $2 a cup, your business might be worth one amount. If the price of lemonade jumps to $15 a cup, your business is worth a very different amount.

Commodity currencies work on the same principle: as the price of the metaphorical lemonade changes, the country’s currency changes, too. That’s right: it’s not just announcements like Biden’s foreign policy directives that cause changes in the market—forex is also tied up with national economies and exports. Even if you’re just learning forex, staying on top of global announcements and events will help you thrive.

How Commodity Currencies Work 🏗

Many of the most traded currency pairs are commodity currencies, and they can be very beneficial to investors. Commodity currencies tend to be a very liquid market thanks to a large number of buyers and sellers, which is good because you don’t want to get trapped in a position because there aren’t any buyers out there. 

This image shows some of the main factors that influence currency prices
Commodity prices are one of the more important factors that influence exchange rates.

Commodity currencies also tend to come from more stable economies, which is why there are so many buyers and sellers. This makes commodity currencies a good option for those who are entering and exiting trades quickly, whether you’re day trading forex or even scalp trading

Major Commodity Currencies and Their Characteristics ✅

News about certain commodities can affect the value of that commodity, which in turn can affect a country’s currency. For example, think about oil. This is a major resource that nearly everyone in developed countries requires. 

As it happens, rising fuel demand in April 2021 has caused crude oil prices to jump 1%. This rise would help a country like Canada, which exports oil, and hurt a country like Japan, which imports most of its oil. As their economy grows or shrinks due to the price change, their currency will also rise or fall.

You also might see commodity currencies impacted indirectly. For example, when the US stock market crashes, that often leads to high market volatility. This leads people to invest in gold, which is seen as a safer asset. Countries that export large amounts of gold, therefore, see an increase in their currency price, thanks to the higher price of gold. The opposite can also happen: as consumers become more optimistic in the US, gold prices tend to drop.

Now, let’s dig into some of the major commodity currencies so you know what exactly to look for in the market. We’ll start with some of the most popular currency pairs in the forex market.

Canadian Dollar 🇨🇦

The Canadian dollar has had a strong upward trend in early 2021. In general, the pair USD/CAD correlates very strongly to the price of oil. Canada is a major exporter of fuel and timber thanks to its plentiful natural resources. The Canadian and US economies are very closely tied, and 75% of Canada’s exports are to the US.

As the fifth-largest exporter of crude oil, Canada’s economy and currency are highly tied to this commodity. It has the third-largest oil reserves in the world, and can be an attractive place for exports due to political turmoil in the Middle East and South America. Below you can see the correlation between the price of oil and USD/CAD: When oil prices rise, USD/CAD falls. When oil prices decline, USD/CAD rises. 

change of crude oil price
A change of crude oil price (orange) discretely followed by the price of CAD/USD (blue). Image by TradingView.

Other pairs are also particularly respondent to the price of oil, including CAD/JPY. Japan imports almost all of its oil, so it is also sensitive to changes in oil price. Oil prices therefore also tend to indicate how CAD/JPY will change, though it is not quite as strong as USD/CAD. CAD/JPY will usually rise after major increases in oil prices, and decline after price drops, as seen in the following chart.

CADJPY candlestick
CAD/JPY (candlestick) following the ups and downs in oil prices (orange). Image by TradingView.

Russian Ruble 🇷🇺

The Canadian dollar isn’t the only thing that changes with oil prices. The Russian ruble also tracks them very closely. Russia doesn’t have as diverse a list of exports as Canada does: half its exports are oil and natural gas. Before 2018, the ruble and crude oil were highly correlated, as seen in the below chart.

Russian Ruble
The huge correlation between RUB/USD (blue) and oil prices (orange). Image by TradingView.

However, you’ll notice that the correlation stopped in 2018. This is because the US imposed sanctions against Russia due to its meddling in the 2016 presidential election. So put this one in your pocket for later, and keep an eye on global news on US/Russia relations!

Colombian Peso 🇨🇴

The Colombian Peso still correlates strongly with oil prices. Oil exports account for 20% of government revenue and 25% of exports in Colombia. Colombia is now the fifth-largest exporter of oil to the United States.

COPUSD goes down
COP/USD goes down almost 40% as oil trends downwards. Image by TradingView.

Australian Dollar 🇦🇺

Australia offers one of the most important commodity currencies, as the biggest exporter of coal and iron ore, and a major source of petroleum and gold. Australian currency correlates to the prices of all these commodities. Because of this, Australia’s leading forex brokers tend to stay quite busy.

The AUD is most closely correlated with the price of gold, and Australia is the second-largest global producer of gold. As you can see from the below chart, the Australian dollar rises when gold prices rise. Some investors see trading AUD as equivalent to trading gold.

AUDUSD correlation
Very strong correlation between gold/USD (purple) and AUD/USD (blue). Image by TradingView. 

Moreover, Australia’s economy is closely linked with China’s, as China is its biggest customer—especially in the iron department. If Australia’s exports to China are increasing, that indicates that the Chinese economy is growing. A strong Chinese economy can impact the globe, but it will be especially good for Australia.

New Zealand Dollar 🇳🇿

Right next door to Australia, we have New Zealand! As neighbors, these economies are very closely linked. New Zealand is the largest exporter in the world of concentrated milk, and they also trade meat, wool, and other dairy products.

New Zealand’s currency also reacts to changes in gold prices, thanks to its correlation with the Australian economy. When NZD/USD drifts downward, commodity prices may be able to help investors predict what might be coming next—in this case, AUD-friendly commodities and sheep-related products are often worth looking at.

Peruvian Sol 🇵🇪

Quick! Three guesses for the highest-value export out of Peru. If you guessed copper, that’s right! Copper accounted for 24% of Peru’s exports in 2016, and it’s the second-largest producer of copper in the world. In recent years, Peru’s currency has declined along with the price of copper.

Peruvian Sol
The correlation between copper price in USD and PEN/USD. Image by TradingVIew.

Other Commodity Currencies 🌏

We’ve covered the most popular commodity currencies so far. Of course, some currencies that are not that popular on the forex market are linked to commodities. For instance, Saudi Arabia and Venezuela both correlate to oil prices. Also, many African countries correlate to the raw materials they export: for example, the South African Rand correlates to gold, iron ore, and platinum. 

However, there are many reasons these currencies might not be as popular as some of the ones we’ve mentioned so far. Several of these currencies have high inflation rates, which has a very negative impact on the currency’s value—which means you won’t be able to exchange it for much. Some of these countries also have poor regulation, which leads to high volatility and unpredictability in their markets.

Trading Commodities vs. Commodity Currency ⚖️

Now, trading commodity currencies is not the same as trading commodities. There’s a very big difference! Remember, a commodity currency is still just a currency at the end of the day. It’s just referring to a type of currency that correlates to the price of a certain commodity. (Currency correlates to commodities—say that three times fast!)

Commodity trading is when you invest in actual, physical things like gold, oil, and more. Instead of trading currencies that are linked to those commodities, you’re trading the commodities themselves. This can be through the trading of futures contracts, derivatives trading, or physical trading. You might trade gold, oil, cotton, wheat, sugar, coffee, lumber, or a host of other goods and resources.

Trading commodity currencies can be a great supplement for traders who are already experienced in trading commodities like oil or gold. A lot of the same research will inform your decision making, and it could help to diversify your portfolio. If you’re not already a commodity trader, you’ll want to set up a system to follow oil and gold prices that might inform your forex trades.

Conclusion 🏁

If you’ve reached this point, you’re now an expert on commodity currencies! (Or should we say, an export? Sorry, commodity pun.) Here’s the big takeaway: many economies rely on specific imports and exports. Those goods will change in price. As the price of goods changes, the economy will change, and the currency will change. And if you can see that coming—ka-ching! Your bank account will change, too. 

If you’re going to be trading commodity currencies, it’s a good idea to keep tabs on the price of oil, gold, and other goods. Stay informed on news that might affect the price of these goods, like global markets and consumer sentiment. You’ll see your hard work pay off in your trades!

Commodity Currencies: FAQs

  • Is Currency a Commodity?

    No—the forex market trades in foreign currencies, profiting off their fluctuations in relative value. Commodity trading refers to investing in actual physical goods. 

  • Is Bitcoin a Commodity?

    Bitcoin has been determined to be a commodity by the Commodity Exchange Act. While most commodities are physical goods like gold or oil, Bitcoin is a new kind of commodity called a digital commodity.

  • Why is JPY a Safe Haven?

    Many investors see JPY as a “safe haven” commodity thanks to its stable political system, its low interest rates, low inflation, and its positive net foreign asset position. Nonetheless, the JPY is still susceptible to change due to market crashes and large swings in the price of commodities like oil.

  • Are Any Currencies Backed by Gold?

    There is currently no currency backed by gold, since the abandoning of the gold standard in 1971. However, some digital currencies—stablecoins—are backed by gold.

Get Started with a Forex Broker

Fees
Average spread EUR/USD standard

1

N/A

All-in cost EUR/USD - active

0.7

N/A

Minimum initial deposit

$100

$0

General
Total currency pairs

82 (in US)

105

Demo account?
Social / copy trading?
Rating
Fees
Average spread EUR/USD standard

N/A

0.9

All-in cost EUR/USD - active

N/A

0.363

Minimum initial deposit

$0

$250

General
Total currency pairs

105

93

Demo account?
Social / copy trading?
Rating
Fees

Average spread EUR/USD standard

1

N/A

0.9

All-in cost EUR/USD - active

0.7

N/A

0.363

Minimum initial deposit

$100

$0

$250

General

Total currency pairs

82 (in US)

105

93

Demo account?

Social / copy trading?

All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.

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