What are trading commodity-linked forex pairs?

Some currencies are strongly affected by the demand and supply of commodities, and these are what make up commodity-linked forex pairs. When a country is one of the largest producers or exporters of certain commodities, its native currency becomes linked to that specific commodity. For instance, if the global demand for coal increases suddenly, then chances are that Australia, which is one of the big exporters, will get a huge inflow of forex. This, in turn, will strengthening its own currency.

Like the demand for coal is linked to the Australian dollar, the value of the Canadian dollar is linked to crude oil, and New Zealand’s dollar to dairy.

NOTE: Forex investments involve significant risk. Do not take the views mentioned here as financial advice. Please conduct thorough research before making any investment.

Trading right with commodity-linked forex pairs

With commodity-linked forex pairs, say the Australian dollar to the Canadian dollar, it is important to keep in mind the demand for their major export commodity. However, it is equally critical to understand the difference between correlation and dependency.

Correlations mean that the forex value change and export demand change being aligned are merely coincidental. Dependency, on the other hand, shows a much more intimate relation between commodity demand and the native currency’s value.

Commodities do not move the value of currencies point-for-point, but strong trends often align over time. For example, sustained oil price increases typically support the Canadian dollar, making pairs like USA’s dollar/Canadian dollar attractive trade candidates.

Scenarios when trading setups arise for commodity-linked currencies

Supply shocks

If OPEC decides to stop oil supply for some time, automatically, the demand rises. As the demand for oil will outdo the supply in such situations, the native currencies of oil-supplying countries will increase.

Seasonal demands and commodity-linked forex pairs

The demand for energy-rich commodities like coal rises when the need for electricity increases during a particular season. So, commodity-linked forex pairs that export coal are expected to see seasonal rise and fall in their trade.

Data from major commodity consumers like China

China is one of the largest importers of commodities. So, if some data comes out that the nation will demand more or less than the present levels, it can help commodity-linked currencies to rise or fall in value.

However, there are some things to keep in mind when trading in commodity-linked forex pairs.

The value of the USA’s dollar

Since most commodity-linked forex currencies are linked to the USA’s native currency, any change there affects the linked currencies as well.

Discrepancy is the demand for commodity-dependant forex pairs

At times, there may be a delay in the value appreciation of a commodity-linked forex pair and the rise in demand for a commodity. In such cases, the value may eventually catch up with time, and a value correction is likely on the cards.

Trading commodity-linked forex pairs does not occur in isolation, and it is best to keep a tab of seasonal changes, macroeconomic policy, and policies of bodies like OPEC to get a holistic picture.

Edited by Abu Amjad Khan