Commodity Currencies

Commodity Currencies

Commodity currencies are currencies of countries that rely primarily on exports of commodities to fuel their economy. The major quirk in the behavior of commodity currencies is that their value will usually go up and down as a country's main exports rise and fall on the floor of the commodity markets. With the exception of Canada, the economies that are home to commodity currencies are relatively small. This is because, generally speaking, the smaller a country's economy, the greater the role of international trade in its economy.
The most commonly traded commodity currencies hail from the three lesser sons of the British empire: Canada, New Zealand and Australia. Because all three officially call their currencies dollars, you'll sometimes hear these three currencies referred to as “comdolls.” Of course, oil is the most important commodity out there, and each of the major oil producing countries are home to a commodity currency.
Canada is an exporter of oil, and even though it produces about the same amount of oil as the US , its economy is far, far smaller than its older brother to its south. So, its currency rises and falls in part due to oil prices. Timber is another major commodity export for Canada, though its price has less of a correlation to its currency's price as does oil.

Gold is another major commodity, and it is the main export that makes Australia's currency a comdoll. In fact, if you look at a chart of gold and a chart of the Aussie, you'll notice that the two have run almost parallel for the better part of two decades now.

The mention of the Aussie chart brings up a good point about commodity currencies, and one that makes trading them a whole lot easier: Commodity prices will almost always begin moving before their currencies do. So, if gold sky rockets, it's just a matter of time before the Australian dollar will do the same. Thus, you keep an eye on the Aussie, and when a break-out trend starts, there's a good chance it will be a big one.
New Zealand's exports are not dominated by any one commodity. However, commodity exports still make up a large portion of its economy. Various commodity indexes have proved to be a good long term predictor of the Kiwi's strength.
Keep in mind that the correlation between the comdolls and their export commodities is very strong, but only in the long term. Short term spikes in commodity prices usually mean little for the correlated currency. Rather, once a long term trend becomes apparent, the forex market sees the writing on the wall, and is quick to react. So, combining long term forex strategies like carry trades with commodity currency-based strategies is often a good idea.