What are the product pairs?

Commodity pairs, or commodity currencies, are those of forex currency pairs countries with large reserves of raw materials. These pairs are highly correlated to changes in commodity prices since countries produce and export various commodities. Traders and investors seeking exposure to fluctuations in commodity prices often take positions in commodity currency pairs as an indirect investment to buy goods.

Commodity pairs include the US dollar pairing (USD) with the Canadian dollar (BODY), Australian dollar (USD) and the New Zealand dollar (NZD). The Russian ruble (TO RUB), Brazilian real (BRL) and Saudi riyal (SAR) are also currencies sensitive to commodity prices.

Key points to remember

  • Commodity pairs refer to the currencies of economies that are sensitive to changes in commodity prices and are often countries that depend on commodity exports for their GDP.
  • Examples include the Australian, Canadian and New Zealand dollars as well as the currencies of oil-producing countries.
  • Investors trade commodity currencies, in part, to profit from fluctuations in commodity prices that determine the exchange rates of these countries.

Understanding Product Pairs

Commodity pairs offer advantages to investors as they are among the most traded currency pairs in the market. foreign exchange (FX) market. Currency trading is the act of taking a position on the exchange rates of various currencies. Forex trading involves the buying and selling of foreign currencies at their prevailing exchange rates with the goal of the rate moving in favor of the investor.

A US-based trader, for example, might buy the Australian dollar against the US dollar exchange rate (AUD/USD) at the prevailing rate of 0.7500, which is 75 US cents to one Australian dollar. If the trade rises to 0.8500, the trader will book an offsetting trade to close the position and pocket the profit of 0.1000 cents (minus the broker fees or charges). In forex trading, there is no actual delivery of the currency. Instead, the offsetting transaction closes the position and the net amount gained or lost is traded and processed through the trader’s brokerage account.

Liquidity

The market for commodity pairs tends to be very liquid, which is a market where trades can be executed easily because there are plenty of buyers and sellers available. Conversely, a Something market can cause traders to find it difficult to exit a position due to a lack of market participants. The stability of their economies, which support currencies, also adds to the liquidity of commodity pairs. These characteristics make commodity pairs attractive to traders who want profit potential while entering and exiting trades quickly.

Other producing countries

Although many countries have large reserves of natural resources and raw materials, such as Russia, Saudi Arabia and Venezuela, the raw materials of many of these countries are generally highly regulated by their national governments or poorly traded. .

Top Currencies in Commodity Pairs Trading

The three countries that make up the non-US components of the trio of commodity pairs all have specific qualities that make their currencies and commodity resources attractive to investors.

BODY

The value of the Canadian dollar against the US dollar (USD/CAD) is strongly correlated to the price of raw materials, including oil. Canada’s vast regions with relatively unspoiled landscapes mean that the country is rich in natural resources such as timber and fuels. The Canadian economy is highly dependent on the production and sale of commodities. Petroleum and fuels, for example, account for the largest share of the country’s exports. Therefore, the price of oil is a major driver of the health of the economy. Trading this pair is also known as trading the “loonie”. Canada’s proximity to the United States means that the two economies are closely linked, which can be seen in total exports, with 75% of Canadian exports going to the United States in 2019.

USD

Swapping the Australian dollar for the US dollar exchange rate is also known as swapping the “Aussie”. Australia is the world’s largest exporter of coal and iron ore.Australia also has vast expanses of lush natural landscapes and is one of the most resource-rich countries in the world. The country also exports oil and gold, and its currency is therefore highly dependent on the prices of these commodities.

Besides being a commodity currency pair, Australia also provides investors with insight into the performance of the Chinese economy as China is Australia’s largest export customer.If Australia increases its exports to China, it is reasonable to conclude that economic growth recovers in China. A strong Chinese economy bodes well for the rest of the world as well as for Australia, which may increase the Australian dollar exchange rate due to increased demand for Australian goods.

NZD

New Zealand is the world’s largest exporter of condensed milk and also exports other dairy products, meat and wool. New Zealand has a strong bond with gold and will react to movements in the price of the commodity. Exchange the New Zealand dollar for the US dollar (USD/USD) is also known to trade the “kiwi”.

The demand for kiwifruit is also driven by the fact that New Zealand generally has higher interest rates than many other countries. As a result, investors often send their money into the country to earn a higher return. Some of these investors borrow money from low-interest countries like Japan and convert these borrowed funds (from japanese yen) in NZD to invest in New Zealand banks. This process of financing investment by borrowing from a low-yielding country to invest in a higher-yielding country is called the currency carry trade.

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