| A Crossmarket Forex Strategy: Analysis of the “Commodity Currencies” |
 One can think of the Forex market as a macroeconomic gauge of the performance of other global markets. All global financial markets have one common denominator: money. The various forms of that money (in the name of currency) is where Forex comes in. Commodities are one such market that has a far reaching impact on Forex. Increased commodity demand in prosperous economic times correlates to some currencies gaining strength and vice versa. The two major “commodity currencies”; the Canadian and Australian Dollars, are most impacted by the flux of commodity prices. “Crossmarket analysis” of commodities examines commodity prices, and their impact on Forex. Therefore, it is important to implement some crossmarket analysis when executing your Forex strategy.The Australian Dollar is often viewed as a “risk” currency that has a positive correlation with the price of precious metals. Australia is rich with metals and minerals, ranging from coal, iron ore, lead, gold and uranium. Mining constitutes 5.6% of Australian GDP [1], and Australia is a major exporter of these minerals. Demand for lead, iron ore and coal increases with booming industry. As more exports leave Australia at higher prices, Australia's GDP and revenue increase. In terms of a Forex strategy, this equates to a higher Australian Dollar. This is why the Australian Dollar is referred to as a “commodity currency.” Additionally, the ascent in Gold prices from $280.00/oz in the late 1990s to over $1350.00/oz at the time of this article have correlated to a higher Australian Dollar. The Canadian Dollar is the other major “commodity currency.” It appreciates for the same reason the Australian Dollar does, except substitute “oil” for “precious metals and minerals.” The global demand, and subsequent price of oil is also a gauge of economic health. As business booms, more tucks are one the road, ships cross the oceans, a greater number of factory machines are running, and energy demand is higher (Note: oil does have other drivers of its price: inflation, war, natural disasters...but the ultimate influence on its price is consumer demand). Oil is a critical component of modern business, and Canada is the world's seventh largest producer of it [2]. As the price of oil goes, so does the Canadian Dollar. The law of supply and demand states that as demand increases, so does price. When demand for commodities grow, revenue is increased for their producers. This is why it is so important to perform “crossmarket analysis” when implementing a Forex strategy. Paying close attention to price trends in the commodities sector gives the Forex trader a clue as to the direction of the Australian and Canadian Dollars. For example, a rallying Canadian Dollar coupled with depreciating oil should be met with skepticism from the trader. Crossmarket analysis looks for confirmation of rallies. In this example, the normal correlation is not present, and therefore requires further analysis before a trade is placed. Sources: Australian Bureau of Statistics, “100 Years of Change in Australian Industry”, http://www.abs.gov.au/Ausstats/abs@.nsf/Previousproducts/1301.0Feature%20Article212005?opendocument&tabname=Summary&prodno=1301.0&issue=2005&num=&view= [1]. National Engergy Board, “Estimated Production of Canadian Crude Oil and Equivalent”, http://www.neb.gc.ca/clf-nsi/rnrgynfmtn/sttstc/crdlndptrlmprdct/stmtdprdctn-eng.html [2]. |
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