Add Commodity Currencies To Your Forex Trading Strategy

If you're new to the world of online forex trading, you may not be aware of just how closely related currencies and certain commodities are. Now you certainly don't need to trade commodities in addition to forex to become a good forex trader, but it does pay to follow select commodities, namely gold and crude oil. Crude oil and gold are the two most heavily traded commodities and they have the deepest impact on the forex market.

The most complete and comprehensive forex trading strategies include keeping an eye on commodities to put the trader in position to benefit from what are known as commodity currencies. These are currencies that have intimate correlations to the price of commodities and since the commodities market is every bit as volatile as forex, knowing about commodity currencies can prove quite profitable for your forex trading strategy.

With that in mind, let's take a look at what currencies you need to pay attention to to profit from price action in crude oil and gold. As far as crude oil goes, black gold is the most active of all commodities. Crude oil is denominated in U.S. Dollars and conventional wisdom holds that when the price of oil rises, the value of the Dollar falls. Unfortunately, profiting from rising crude oil prices isn't as simple as shorting the greenback. You also have to know what major currency stands to benefit the most from rising oil prices and that would be the Canadian Dollar.

Of all the countries that have a “major currency,” Canada is the only one that is a net exporter of crude oil. In fact, Canada is one of the largest oil exporters in the world. The world's two largest economies, the U.S. and Japan, get a fair bit of their oil from Canada. On a historical basis, the Canadian Dollar is 70%-80% correlated to the price of oil. This is actually an easy trade because the currency lags the commodity, so as oil moves up, you'll have some time to get long the Canadian Dollar. The pairs to trade are USD/CAD and JPY/CAD.

As we said, gold is another commodity forex need to watch and the commodity currency for gold is the Australian Dollar. Gold is also denominated in U.S. Dollars and that makes the AUD/USD the ideal pair to trade when gold prices rise. The Aussie Dollar's correlation to gold prices is roughly equivalent to that of the Canadian Dollar's ties to crude oil and again, the commodity will move before the currency, so you will get a signal to get long AUD/USD. Other pairs to consider would be JPY/AUD and GBP/AUD.

Another commodity currency, although it is kind of a stretch to call it that because it is tied to a particular commodity, is the New Zealand Dollar. The New Zealand Dollar is responsive to overall commodities demand so if you see a variety of commodities rising in price, go long NZD/USD. The bottom line is commodity currencies are a great pip-making strategy for all forex traders.