What is Commodity Pairs
Commodity pairs are designate three frequently combined forex currency pairs from countries with large amounts of commodity reserves. The commodity pairs include paring the U.S. dollar (USD) with the Canadian dollar (CAD), Australian dollar (AUD), or the New Zealand dollar (NZD). These pairs are highly correlated to changes in commodity prices. Traders looking to gain exposure to commodity fluctuations often take advantage of these pairs.
The USD/AUD and USD/NZD pairs tend to be firmly connected to and influenced by the activity of gold prices. The USD/CAD pair, on the other hand, tends to correlate to the cost of oil.
BREAKING DOWN Commodity Pairs
Commodity pairs offer benefits to investors because they are among the most widely traded currency pairs on the foreign exchange (FX) market. These pairs also tend to be very liquid, and the economies backing the currencies are incredibly stable. These characteristics make commodity pairs attractive to traders who want to have the potential for quick profits while moving in and out of trades quickly.
Although there are many countries with significant natural resource and commodity reserves, such as Russia, Saudi Arabia and Venezuela, the commodities of many of these nations are usually highly regulated by their domestic governments or thinly traded.
Countries Involved in the Commodity Pairs Trade
The three countries that make up the non-U.S. components of this trio of pairs all have specific qualities that make them, and the commodities resources they possess, appealing and potentially lucrative for investors.
- USD/CAD The value of the Canadian dollar is highly correlated with the price of commodities, especially oil. Because the Canadian economy is heavily reliant on oil, the cost of oil dictates the health of the economy. Trading this pair is also known as trading the "loonie." Canada’s vast regions of relatively unspoiled landscapes mean the nation is teeming with natural resources such as timber and fuels. Canada’s proximity to the U.S. suggests the two countries’ economies are closely tied, and trade between the countries moves at a high volume.
- AUD/USD Australia is the most abundant global coal and iron ore exporter. Australia also has extensive areas of lush natural landscapes. In fact, it is one of the most resource-rich nations in the world. The country also exports petroleum and gold, and its currency is, therefore, heavily dependent on these commodity prices. This pair is the is the fourth most traded combination and is also known as trading the "Aussie."
- NZD/USD The New Zealand dollar is considered a carry trade currency. Traders will often buy the NZD and fund it with lower yielding money such as the Japanese yen or the Swiss franc. New Zealand is the worlds biggest exporter of whole milk powder and also exports other dairy products, meat, and wool. New Zealand also has a solid connection to gold and will react to movements in the commodity's price. Trading this pair is also known as trading the "kiwi."