What Are the Commodity Pairs?

Commodity pairs, also known as commodity currencies, are forex currency pairs originating from countries abundant in commodity reserves. These pairs exhibit high correlation with commodity price changes as the countries primarily engage in the production and export of various commodities. Traders and investors frequently utilize these pairs to gain exposure to fluctuations in commodity prices, often using them as a proxy investment for trading commodities directly.

Examples of commodity pairs include pairing the U.S. dollar (USD) with the Canadian dollar (CAD), Australian dollar (AUD), and the New Zealand dollar (NZD). Other currencies sensitive to commodity prices such as the Russian ruble (RUB), Brazilian real (BRL), and Saudi riyal (SAR) are also classified as commodity pairs.

**Key Takeaways:**

• Commodity pairs are currencies linked to economies highly impacted by commodity price changes, typically reliant on commodity exports for economic strength.
• Notable examples encompass the Australian, Canadian, and New Zealand dollars, along with currencies from oil-producing nations.
• Investors engage in trading commodity currencies to exploit fluctuations in commodity prices influencing the respective countries’ exchange rates.

Understanding Commodity Pairs

Commodity pairs offer significant advantages to investors as they represent some of the most actively traded currency pairs on the foreign exchange (FX) market. Forex trading involves taking positions based on the exchange rates of various currencies, with the goal of profiting from favorable rate movements.

For instance, a U.S.-based trader might purchase the Australian dollar against the U.S. dollar exchange rate (AUD/USD) at 0.7500, equating to 75 U.S. cents for one Australian dollar. Subsequently, if the rate ascends to 0.8500, the trader can execute an offsetting trade to close the position and realize a profit of 0.1000 cents (excluding broker fees or charges).

In forex trading, physical currency delivery does not occur. Instead, closing out the position through an offsetting trade facilitates the exchange of the net profit or loss through the trader’s brokerage account.

Liquidity

Commodity pairs typically exhibit high liquidity, enabling seamless trade executions due to an abundance of buyers and sellers in the market. In contrast, an illiquid market can hinder traders from exiting positions swiftly due to the limited presence of market participants.

Additionally, the stability of the economies backing these currencies contributes to the liquidity of commodity pairs. These characteristics make commodity pairs appealing to traders seeking profit potential while engaging in rapid trade transitions.

Other Commodity Countries

Despite numerous countries possessing substantial natural resources and commodity reserves like Russia, Saudi Arabia, and Venezuela, the commodities of these nations are often subject to stringent domestic regulations or exhibit thin trading volumes.

Major Currencies in the Commodity Pairs Trade

The non-U.S. components of the trio of commodity pairs, comprising Australia, Canada, and New Zealand, possess distinctive qualities that render their currencies and commodity resources attractive to investors.

CAD

The correlation between the value of the Canadian dollar relative to the U.S. dollar (USD/CAD) and commodity prices, particularly oil, is pronounced. Canada’s abundant natural resources, including timber and fuels, play a pivotal role in the nation’s economy.

The Canadian economy heavily relies on commodities, with oil and fuels comprising a significant portion of the country’s exports. Consequently, oil prices significantly influence the economic health of Canada.

Trading the USD/CAD pair, referred to as trading the “loonie,” is commonplace. Given Canada’s proximity to the U.S., the two economies are closely interconnected, evident in the substantial share of Canadian exports directed to the U.S. in recent years.

AUD

Trading the Australian dollar against the U.S. dollar, known as the “Aussie,” offers investors exposure to a currency from a country extensively exporting coal and iron ore globally. Australia’s natural abundance and export of petroleum and gold contribute to its heavy reliance on commodity prices, shaping the value of its currency.

Apart from its role as a commodity currency, Australia’s economy provides insights into the performance of China, its largest export partner. Increasing exports to China signal potential economic growth in China, positively impacting Australia as well. This growth trend can bolster the Australian dollar exchange rate by driving up demand for Australian goods.

NZD

New Zealand ranks as the largest concentrated milk exporter globally, alongside exports of other dairy products, meat, and wool. Notably tied to gold, movements in gold prices significantly impact the New Zealand dollar, known as the “kiwi,” when traded against the U.S. dollar.

Additionally, the demand for the kiwi is partly driven by New Zealand’s comparatively higher interest rates, attracting investments seeking higher yields. This interest rate differential prompts investors to borrow funds from low-interest-rate countries like Japan, converting these funds to NZD to invest in New Zealand, a strategy known as the currency carry trade.

The currency carry trade involves borrowing from a low-yield country to invest in a higher-yielding country, benefiting from the interest rate differentials.