When analyzing financial instruments, it’s important to take into an account the fact that some assets are highly correlated. Many Stock prices are correlated with their Indexes. Some currencies are correlated with other currencies. And some currencies are correlated with commodity prices.
Commodity Pair definition
Currencies that are correlated with certain commodity prices are called commodity currencies. And when these currencies are generally paired with USD, they are referred to as commodity pairs.
Why is understanding the Commodity Pair important for traders?
- Understanding the correlation between currencies and different commodities can greatly improve your market analysis.
- Trading commodity pairs might give you an advantage when placing trading orders.
- When you understand the different aspects that make up the currency price, the less blind decisions you make.
Thorough Commodity Pair Explanation
Commodities are raw materials that are mined or grown. Some countries and their economies are heavily influenced by price fluctuations on Oil, Sugar, Wheat and other commodities. Currencies are like mirrors that reflect the health of certain economies rapidly.
Commodity prices are affected by global demand and supply. High demand translates into high prices and vice versa.. Learning how commodity prices are affected and conducting technical and fundamental analysis on certain commodities can enable you to trade certain currency pairs as well. As some currencies and some commodities are closely tied to each other.
Example of Commodity Pairs in Forex
Opec countries and their economies like Saudi Arabia and Russia are heavily dependent on Oil and natural resources. However, their currencies are mildly correlated with commodity prices due to the fact that governments strictly control domestic currency valuation.
On the other hand currencies like Australian Dollar (AUD), Canadian Dollar (CAD) and New Zealand Dollar (NZD) are among top commodity currencies.
USD/CAD
This commodity pair informally is also known as “loonie”. Canada produces a lot of Oil and Timber and both commodities heavily influence the currency price. In addition ¾ of Canada’s exports are consumed by the USA and both economies are closely correlated with each other.
AUD/USD
The pair is informally also known as “Aussie”. Australia is rich in natural resources, mainly coal and iron. Australia is also rich in Gold and Petroleum. Global price changes for these commodities can greatly affect the AUD/USD pair.
NZD/USD
The New Zealand Dollar and USD pair is also known as “kiwi”. New Zealand exports a large amount of dairy products, meat and wool. Furthermore, the country is rich in gold.
Investors base their fundamental analysis on commodity prices when investing in certain currency pairs. As a result, correlation only grows between certain currencies and commodities.
FAQs on Commodity Pair in Trading
Is it worth it to trade a commodity pair?
It’s certainly worth learning about the correlation between commodities and currencies. What’s more, some currency pairs like EUR and GBP are highly correlated with each other. The more you know in the markets, the better trading decisions you can make. But ultimately the answer to the question whether you should be trading commodity pairs or not, depends on the individual.
What does a commodity pair mean in Forex?
Some currency prices are highly correlated with certain commodity prices. These currencies when usually paired with USD are referred to as commodity pairs. AUD/USD, NZD/USD, and USD/CAD are among the top traded commodity currencies.