Commodity Currencies and Forex Correlation
Several major currencies are strongly correlated with commodity prices. Understanding these relationships allows you to trade both markets more effectively.
What Are Commodity Currencies
Commodity currencies are currencies of countries whose economies depend heavily on commodity exports. The three primary commodity currencies are:
Australian Dollar (AUD)
- Australia is a major exporter of iron ore, coal, gold, and natural gas
- Iron ore is the single most important export
- Strong correlation with Chinese economic growth
- AUD/USD tracks iron ore and copper prices
Canadian Dollar (CAD)
- Canada is a major exporter of crude oil, natural gas, and metals
- Oil is the dominant export
- USD/CAD inversely correlated with oil prices (oil up = CAD stronger = USD/CAD down)
- Also influenced by lumber and agricultural exports
New Zealand Dollar (NZD)
- New Zealand exports dairy products, meat, wool, and timber
- Dairy prices (Global Dairy Trade auction) directly impact NZD
- Also influenced by agricultural commodity prices
- Smallest of the three, most volatile
Secondary Commodity Currencies
Norwegian Krone (NOK)
- Norway is a major oil and gas exporter
- Sovereign wealth fund provides stability
- EUR/NOK inversely correlated with Brent crude
South African Rand (ZAR)
- South Africa exports gold, platinum, palladium, coal, iron ore
- Precious metals prices significantly impact ZAR
- High volatility and carry trade dynamics
Russian Ruble (RUB)
- Russia exports oil, gas, metals, and agricultural products
- Among the strongest commodity correlations of any currency
- Geopolitical risk adds complexity
How to Use Commodity-Currency Correlations
Confirmation Signals
- If oil is rallying AND CAD is strengthening, the move has fundamental backing
- If gold is falling but AUD is rising, something else is driving AUD
- Divergences between commodity and currency can signal reversals
Intermarket Analysis
- Check commodity prices before trading commodity currencies
- Use commodity charts to identify potential currency entries
- If commodities are at major support/resistance, expect currency moves
Cross-Market Trades
- Long AUD/JPY as a proxy for risk-on and commodity strength
- Short USD/CAD as a proxy for oil longs
- Long NZD/USD during dairy price rallies
Correlation Breakdown
Correlations can break down when:
- Interest rate differentials override commodity influence
- Central bank intervention occurs
- Risk sentiment dominates (risk-off moves hurt all commodity currencies)
- Domestic economic factors take precedence
Key Takeaways
- AUD, CAD, and NZD are the primary commodity currencies
- Understanding the correlation helps confirm trade ideas in both markets
- Divergences between commodities and currencies can signal opportunities
- Correlations are tendencies, not certainties
- Central bank policy can override commodity correlations temporarily
Lesson Discussion