This tutorial talks about the commodities in trading and how their behaviour impacts the market behaviour. By going through this, you will further be able to find the best-traded commodities around the world and its relationship with the market.
- Different Commodities in the Forex market
- Currency pairs’ relationship with commodities
- Getting to know of some Forex Instruments
Correlation between a country's currency price and Commodities
A country’s economy depends on various things connected with its imports and exports. Countries from the four corners of the world import goods from other countries while exporting their goods to other countries. This phenomenon maintains the currency price of each country by its value. That means the difference between the total imports and exports have an impact on currency rates and values.
Countries in the world have their own type of economy correlated with a commodity. For example, Australia’s major export commodity is coal and is having $66 Billion AUD as revenue in 2018 for Coal.
But to illustrate this correlation between commodities and currency pairs, we will take Gold for an example as it is very much connected with your day to day life.
Australia exports most of worlds Gold after China and it officially revealed $20 Billion worth Gold exported in 2018. Price of AUD depends on the world’s gold price and the export quantities of gold from its mines.
Canada has the world’s third-largest Crude Oil reserves after Venezuela and Saudi Arabia.
Price of CAD depends on the world’s oil price and the amount of crude oil it can export.
As a Forex trader, having an idea of the currency price of each country is really important in taking decisions. Currencies always trade as pairs. When trading a currency pair, we must have a clear idea about the price fluctuations of each currency. As we mentioned earlier, things affecting a country's currency price depends on its economy. For our concern as forex traders we must keep in touch with all financial and political status of all countries.
Not all the currencies in the world affect forex trade as most of them are illiquid. Countries with heavily trading commodities have high liquid currencies that most of them include “major pairs” and “crosses”.
Commodities are goods which are taken from their basic natural state and upgraded to the minimum state of achieving a sale in a market. As a list Crude oil, Gold, beef, gas, copper, silver, salt, timber, iron, coffee, rice, weeds...etc are commodities widely sale in the world. Commodities are mostly traded by contracts as they graded and sell in large quantities.
As an example, let us take timber.
Timber can be traded under many producers. If timber from different producers are in the same grade, no matter in which origin that they come from they are priced as same as in contracts.
Crude oil is unrefined petroleum extracted from oil fields located in some places on earth. Oil used by the world is taken by Drilling the earth into underground oil reservoirs. Crude oil is sold in barrels before the refining process. Crude oil is one of the world’s best liquid commodities managed by many institutions throughout the world.
Some countries are major exports of crude oil while some countries are major imports. Both types of countries’ economies depend on import & export rates of their crude oil amount. As Forex traders, it is important to have knowledge about the currencies that depend on crude oil trade to take better decisions Forex exchange.
Yellow metal or Gold was used as a currency by the whole world but today it has become a really valuable precious metal. China is the largest gold producing country while Australia sits in second place. Gold reserves of a country make it's economy strong among other competitive countries as it can be traded in many situations.
Take AUD/USD and USD/CAD pairs.
Before you begin to find current market conditions below. So that we hope you would clearly understand the example.
- Gold price strengthens AUD because AUS has a higher proportion of having gold reserves
- Crude oil price strengthens CAD as Canada has got a higher share of crude oil reserves.
- Gold is mostly traded using USD.
Canada exports most of its crude oil to USA, CAD gets automatically strengthen as it increases Canada exports. And when Australia exports Gold to USA, AUD, in the same way, begins to get stronger. Therefore, USD weakens respectively."
As another currency correlation with gold, let us take AUD/USD and USD/CHF. When the Gold price goes up, value of USD goes down. While Switzerland has 25% of its currency reserves as gold, value of CHF goes up weakening USD.
Stocks are the shares of the capital of a company which explains as dividing ownership of a company under a legal agreement. Shares or stocks can be exchanged by a stock exchange market. Stocks are trading privately under broker companies controlled by the country’s central bank.
Every country has its own currency as USA has US dollars and New Zealand has New Zealand dollars. Internet has its own currency type called cryptocurrency making Bitcoin(BTC) the most popular. Some Forex brokers accept bitcoins for trades.
There is no physical formation of bitcoins while it is totally digital. Design of bitcoin lays as a limited number of bitcoin supply planned to mine. The last bitcoin will be out in the year 2140. There is no single authorized institution controls bitcoin however the value of the bitcoin depends on simple factors as supply and demand etc. It is really easy to predict the fluctuation of bitcoin value since there are less factors that affect its market. This situation eases the market analysis too.