Correlation is an essential part of the financial market that explains the relationships of various assets. For example, some currency pairs or other assets tend to move in a similar direction, meaning they are correlated. Others usually move in separate directions, meaning that they are inversely related. In this article, we will look at some of the most popular commodity currencies in the market.
What is a commodity currency?
A commodity currency is one that is closely associated with a certain natural commodity. These currencies are usually from countries that produce a significant amount of commodities. For example, Nigeria and Qatar usually make most of their money from crude oil. Therefore, when the price of crude oil falls, it means that Nigeria’s economy will suffer, with little foreign exchange and a high unemployment rate. As such, the country’s currency tends to weaken, as shown in the chart below.
Nigerian dollar vs. Brent crude oil
The Norwegian krone is one of the leading commodity currencies because of the amount of crude oil Norway exports every year. Norway, the biggest oil exporter in Europe, has more than 5.6 billion reserves. And in 2019, the country exported oil worth more than $57 billion, which is more than the other top ten exports combined. Its other leading exports are fish, machinery, and aluminum.
At the same time, Norway imports only a small amount of oil and petroleum products every year because the country has committed to lowering its carbon emissions. Norway is on the way to withdraw from its oil-dependent economy. The country has the highest number of electric cars per capita in the world as well.
As a result, the Norwegian krone tends to have a significant relationship with the crude oil price. And the krone usually falls when the price of oil falls and vice versa. You can see this in the chart below.
Crude oil price vs. Norwegian krone
Chile is a resource-rich country that is also one of the biggest exporters of copper. Every year, the country exports copper worth more than $21 billion. This makes it the second-biggest contributor to the economy after iron ore, slag, and ash. Most of these commodities are sold to China in dollars. The country is also a leading importer of commodities like crude oil and refined petroleum.
Therefore, the Chilean peso tends to react to the latest trends in the copper market. Its value rises whenever the price of copper rises and vice versa. This is because, when the copper price rises, it means that the economy will do relatively well by lowering the unemployment rate and having more foreign exchange.
For example, in the past six months, the price of copper has risen by more than 40%, while the Chilean peso has jumped by more than 10%, as shown below. Still, the challenge is that the Chilean peso is not offered by most online brokers.
Chilean peso vs. crude oil
Canada is not thought of as a major commodity exporter. However, in reality, the country is one of the biggest commodity exporters in the world. For one, the country is the fifth-biggest oil exporter in the world after the United States, Saudi Arabia, Russia, and China. It produces more than 4.5 million barrels of oil every day. It also sells crude oil worth more than $98 billion every year. This is equivalent to more than 21% of total annual exports. The other leading exports are vehicles and machinery.
Therefore, while crude oil is not the primary mover of the Canadian dollar, there is usually some similarity. This is because, when the price of oil falls, Canada usually receives less money in foreign exchange. The vice versa is also true. The chart below shows the close relationship between global oil prices and the Canadian dollar.
Canadian dollar vs. crude oil price
Russia is one of the leading commodity exporters in the world. The country is the third-biggest exporter of crude oil in the world. It is also the biggest seller of natural gas and wheat in the world. Also, because of sanctions and its poor relationship with the west, the country does not sell significant manufactured products abroad.
In 2019, the country sold crude oil and natural gas worth more than $220 billion. That was equivalent to 52% of the total exports. Its other key exports are iron and steel, precious metals, and wood. Because of its abundant oil and natural gas deposits, the country imports a relatively small amount of them.
Therefore, because of its dependence on crude oil, the Russian ruble tends to be affected by the movement in the asset. This is shown in the chart below.
Russian ruble vs. crude oil price
Australia is one of the biggest commodity exporters in the world. The country’s main export commodities are coal, iron ore, natural gas, and gold. It exports $138 billion worth of these goods. Most of these commodities are sold to China, which is the biggest consumer of those. This explains why Australia has been on a growth path for more than three decades.
Therefore, the Australian dollar tends to react to the movement in global commodities. In the chart below, we see that the currency tends to move in a similar direction to the United States Commodity Index.
Australian dollar vs. commodity index
Other currencies tied to major commodities include the Saudi Arabian riyal, the Kuwaiti dinar, and the Peruvian sol. However, it is worth noting that all these currencies are affected by other major factors. For example, since the dollar is usually the benchmark currency, they are affected by the Federal Reserve’s actions.
Also, currencies like the Russian ruble and the Saudi riyal are mostly affected by geopolitical issues. Therefore, as a trader focusing on these currencies, it is important that you also focus on other key movers like economic data and central bank actions.