Commodity Pairs
What Are the Commodity Pairs?
The commodity pairs, or commodity currencies, are those forex currency pairs from countries with large amounts of commodity reserves. These pairs are profoundly connected to changes in commodity prices since the countries produce and export different commodities. Traders and investors hoping to gain exposure to commodity price variances frequently take positions in commodity currency pairs as a proxy investment to buying commodities.
The commodity pairs incorporate pairing the U.S. dollar (USD) with the Canadian dollar (CAD), Australian dollar (AUD), and the New Zealand dollar (NZD). The Russian ruble (RUB), Brazilian real (BRL), and Saudi riyal (SAR) are likewise currencies sensitive to prices of commodities.
Understanding Commodity Pairs
Commodity pairs offer benefits to investors since they are among the most widely traded currency pairs on the foreign exchange (FX) market. Forex trading is the act of taking positions in the exchange rates of different currencies. Forex trades include buying and selling foreign currencies at their overarching exchange rates with the goal that the rate will move in the investor's approval.
A U.S.- based trader, for instance, could buy the Australian dollar versus the U.S. dollar exchange rate (AUD/USD) at the overarching rate of 0.7500, which means 75 U.S. pennies for one Australian dollar. In the event that the exchange ascends to 0.8500, the trader would book an offsetting trade to close out the position and pocket the profit of 0.0100 pennies (minus the broker fees or charges). In forex trading, there is no actual delivery of the currency. All things being equal, the offsetting trade closes out the position, and the net amount earned or lost is exchanged and handled through the trader's brokerage account.
Liquidity
The market for commodity pairs will in general be very liquid, which is a market where trades can be executed effortlessly since there are a lot of buyers and dealers accessible. On the other hand, a illiquid market can lead to traders encountering difficulty in leaving a position due to a lack of market participants. Additionally adding to the liquidity of commodity pairs is the stability of their economies, which back the currencies. These characteristics make commodity pairs attractive to traders who need to have the potential for profits while moving all through trades rapidly.
Other Commodity Countries
Despite the fact that there are numerous countries with huge natural resource and commodity reserves, like Russia, Saudi Arabia, and Venezuela, the commodities of a large number of these nations are normally exceptionally regulated by their domestic states or thinly traded.
Major Currencies in the Commodity Pairs Trade
The three countries that make up the non-U.S. parts of the triplet of commodity pairs all have specific characteristics that make their currencies and commodity resources interesting to investors.
CAD
The value of the Canadian dollar to the U.S. dollar (USD/CAD) is exceptionally connected with the price of commodities, including oil. Canada's tremendous areas of somewhat unspoiled scenes mean the nation is overflowing with natural resources like timber and fuels. The Canadian economy is vigorously dependent on the production and sale of commodities. Oil and fuels, for instance, include the largest share of the country's exports. Subsequently, the price of oil is a major driver in the strength of the economy. Trading this pair is otherwise called trading the "loonie." Canada's nearness to the U.S. means the two economies are closely tied, which shows in the export aggregates, with 75% of Canadian exports going to the U.S. in 2019.
AUD
Trading the Australian dollar to the U.S. dollar exchange rate is otherwise called trading the "Aussie." Australia is the most bountiful global coal and iron mineral exporter. Australia likewise has broad areas of lavish natural scenes and is one of the most resource-rich nations in the world. The country additionally exports petroleum and gold, and its currency is, in this way, vigorously dependent on these commodity prices.
Other than being a commodity currency pair, Australia likewise furnishes investors with knowledge regarding how well China's economy is performing since China is the largest export customer of Australia. Assuming Australia is expanding its exports to China, it's reasonable to presume that economic growth is picking up in China. A strong Chinese economy looks good until the end of the world too as Australia, which can increase the Australian dollar exchange rate due to the increase in demand for Aussie goods.
NZD
New Zealand is the world's greatest exporter of concentrated milk and furthermore exports other dairy products, meat, and fleece. New Zealand has a strong association with gold and will react to developments in the commodity's price. Trading the New Zealand dollar to the U.S. dollar (NZD/USD) is otherwise called trading the "kiwi."
Additionally driving demand for the kiwi is that New Zealand normally has higher interest rates than numerous different countries. Thus, investors frequently send their money to the country to earn a higher yield. A portion of those investors borrow the money in low-interest rate countries like Japan and convert those borrowed funds (from Japanese yen) into NZD to invest in New Zealand banks. This course of funding an investment by borrowing from a low-yielding country to invest in a higher-yielding country is called the currency carry trade.
Features
- The commodity pairs allude to currencies in economies sensitive to changes in commodity prices, which frequently are countries that depend on commodity exports for their GDP.
- Models in incorporate the Australian, Canadian, and New Zealand dollars as well as those currencies of oil-creating nations.
- Investors trade commodity currencies, in part, to exploit commodity price changes that drive these countries' exchange rates.
