Understanding How Commodity Currencies Fit In the Current Economy

Understanding How Commodity Currencies Fit In the Current Economy explained by professional Forex trading experts the “ForexSQ” FX trading team. 

Understanding How Commodity Currencies Fit In the Current Economy

Meet the New Players To the Global FX Game

Commodity currencies are a sub- set of the foreign exchange market whose home economy is heavily dependent upon the global demand of a specific economy. If you are comfortable with business cycles or where we are in terms of demand for a specific commodity, that can also lead to a great currency trade. A key benefit of the FX market is that you can buy or sell so as long as there is a clean trend in commodities there’s often an opportunity for you to trade.

Popular Commodity Currencies and Currency Pairs

Some of the most popular commodity currencies are the Australian Dollar (AUD), Canadian Dollar (CAD), New Zealand Dollar (NZD), Norwegian Crone (NOK), and Russian Ruble (RUB).  While this is not a definitive list, whenever the commodity market is moving aggressively these currencies will often follow. The reason these currencies often follow is because a global demand upswing for commodities, which happens in times of either high inflation and or high-growth, aligns with prospering and interest rate hike cycle.

Current State of Global Commodities

Since 2011 we’ve seen the exact opposite of a prospering of commodity dependent economies and have instead seen interest rate cuts due to an apparent global slowdown or worse potential global deflation. Global deflation happens when year-over-year prices decrease which may seem great for consumers but is horrible for businesses that often employ many of the consumers in the global economy.

The week ending on July 24, 2015 saw gold push to five year lows as oil also got near seven year lows. However the breakdown wasn’t just in gold and oil as copper and iron ore are also being dragged to near decade lows.  To show you how hard the commodity sector has been hit, the Thomson Reuters/Core Commodity Index or CRB hit lows not seen since 2008 and over the last 12 months have dropped over 30%.

While different economies have come out of the great financial crisis of 2008 at different paces the one that was quickest outs now seems to be the quickest to fall back down, which was China. While Greece got a lot of attention in the newspapers China’s economic data helps to show how powerful of a driver for global economic health China really is to commodities. The V bottom in many commodities in 2008 early 2009 was on the back of the economic miracle that was China and their government reforms and involvement to help their economy avoid the depths of the credit crisis.

When you looked at the Australian dollar, New Zealand Dollar, and Canadian dollar it was easy to see how commodity currencies quickly rebounded and took over the US dollar from 2009-2011 while China was printing the world’s most impressive GDP and inflation figures. Now at the drop of the commodity index and many commodity currencies, it’s no surprise to see China is not performing at the same pace as they were after the great financial crisis and are now struggling with many other economies.

Intermarket Analysis Refresher

Intermarket analysis is a viewpoint stating that all markets are related such that what happens in one market will affect another market.

While the commodity, currency, bonds, and stock markets are seen as interrelated one of the cleanest inverse correlations historically have been the US dollar and commodities. Due to the high correlation, another inverse correlation is that of US dollar strength and commodity dependent economy weakness.

Across the board, institutions appear to be buying USD’s while selling commodity currencies. While the drop has been very steep and a few retail traders have continually tried to buy the low the quantity currency drop, the end it doesn’t appear anywhere in sight. This move of commodity currents weakness could extend should some of the global economic drivers like China be unable to find footing in the near-term or the US dollar continue to strengthen.

Understanding How Commodity Currencies Fit In the Current Economy Conclusion

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