Currency pairs come in all shapes and sizes, but there are occasions where a national currency will closely correlate with the pricing behavior of a commodity that acts like a proxy for the export driven trade of the country in question. Two such examples can be found in both the Canadian and Australian Dollars. These two currencies have earned the “commodity” moniker over time for good reasons.
Currencies do fluctuate over time, but rarely in the same manner as a stock or commodity that has “intrinsic” value. In the world of currency trading, “intrinsic” value does not exist. “Relative” value is the watchword, as currencies reflect a relative comparison of the health of two nations’ respective economies versus one another. However, the U.S. Dollar presently serves as the world’s “reserve” currency, and most major commodities are, therefore, generally priced in “USD” as an accepted standard for international trade.
Although commodity prices can fluctuate for reasons of their own based on supply and demand factors, the “intrinsic” value factor will influence prices whenever the U.S. Dollar appreciates or depreciates in the market. Similar movements will also be reflected in both the “CAD USD” and “AUD USD” pricing charts, creating a basis for correlation. The currencies for both Canada and Australia have been strengthening versus the greenback over the past two years, in line with similar appreciation trends for oil and steel prices, as depicted by the share value trends for applicable exchange-traded fund values. The basic correlations are visually apparent even with additional perturbations in commodity prices due to supply and demand factors. So go these commodity prices, so go their respective national currency values.
The Canadian Dollar appears to be directly associated with the fortunes of oil, and for good reason. Upon hearing any news regarding oil, one generally thinks that the source of the headline must be from some Arab republic. However, known oil reserve statistics demonstrate that Canada is actually ranked a strong number two in the world, 33% behind Saudi Arabia, and 30% ahead of Iran. Nearly 80% of all exports from Canada are destined for the United States, and we also import a majority of our energy needs from our northern neighbor.
Australia has often been referred to as a land filled with “very expensive rocks”, a reference to their extraordinary wealth of mineral and ore deposits. Mining in Australia has historically been a critical leader of the nation’s economy, accounting for 5.6% of GDP and 35% of exports. Australia ranks highly among the export leaders in nearly every raw material extracted from the earth, presently being the world’s largest exporter of coal, iron ore, lead, diamonds, zinc and zirconium, second largest of gold and uranium, and third largest of aluminum. Australia was able to skirt the recent recession based on its export trade to China of basic raw materials, iron ore and coal topping the list.
Are these the only two major commodity currencies? There is actually one more, the New Zealand Dollar. New Zealand is known for its broad-based agricultural and horticultural exports. Recognized for its dairy and meat products, especially lamb, the country’s economy is heavily dependent on overseas trade. Consequently, the fate of the “NZD USD” currency pair is inextricably tied to global prices for these commodities.
Before trading in a commodity currency “USD” pair, it would be highly advantageous to review the current pricing trends for the respective commodity driver. Although the amplitude of the wave will be diminished, the direction will most likely be congruent.
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. For instance a person who works for air condition repair palm coast couldn’t just take his money and start throwing it all over the place and expect a return on his investment. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite.