1/22/2024

Commodity pairs: how they work

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If you’ve ever been interested in Forex trading, you’ve probably heard about currency pairs. But do you know about commodity pairs? If not, then from this article you will learn more about ideas for trading on the dynamics of commodities.

 

The essence of commodity pairs

Commodity pairs are currency pairs of countries that are large producers and exporters of commodities. These pairs are closely related to changes in commodity prices, since demand for them, as a rule, correlates with the exchange rate of the producing country.

For example, if oil prices rise, then the demand for currency also increases, since these countries are large oil exporters.

Traders and investors who want to take advantage of fluctuations in commodity prices often take positions in commodity currency pairs. This allows them to profit from changes in currency exchange rates without having to buy or sell the commodities themselves.

 

Understanding commodity pairs

  • Wide trading volume: commodity pairs are actively traded in the Forex currency market, which provides liquidity and the opportunity to make a profit.
  • Correlation with commodity prices: Commodity prices tend to correlate with the currency exchange rate of the producing country. This means traders can use commodity pairs to profit from fluctuations in commodity prices.
  • Hedging Option: Traders can use commodity pairs to hedge their commodity positions. For example, if a trader owns oil futures, he can buy the USD/CAD commodity pair to protect himself from a fall in the price of this asset.

 

Liquidity of commodity pairs

There are always many buyers and sellers for commodity pairs, which makes it easy to transact.

The liquidity of commodity pairs also contributes to the stability of their economies, which supports currencies. These characteristics make commodity pairs attractive to traders who want the opportunity to profit by quickly entering and exiting trades.

 

Major currencies in commodity pair trading

The three countries that form the top commodity pairs with the US dollar possess unique characteristics that render their currencies and commodities appealing to investors:

Canadian dollar (CAD)

Canada is a major producer and exporter of primary commodities, including oil, gas, timber and metals. As a result, the price of oil is a major factor in the health of the economy.

Australian dollar (AUD)

Australia plays a priority role in the supply of coal, iron ore, gold and oil. In addition, Aussie demand gives investors an idea of how well China’s economy is performing, as China is Australia’s largest export buyer. If Australia increases its exports to China, it is reasonable to conclude that economic growth in China is accelerating.

New Zealand dollar (NZD)

New Zealand is a strong exporter of agricultural products, such as meat, wool and dairy products. The country is also involved in gold mining, allowing Kiwis to respond to changes in commodity prices.

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