Where a country digs or grows its wealth,its currency follows the commodity's health.
Currencies of countries whose economies are heavily dependent on commodity exports, such as the Australian dollar (AUD), Canadian dollar (CAD), and New Zealand dollar (NZD).
Their values often correlate with commodity prices.
In plain words
Commodity currencies are the currencies of countries that earn a large share of their export income from raw materials such as metals, energy or farm products. The Australian, Canadian and New Zealand dollars are the usual examples. When the price of a country’s main exports changes, so does the amount of foreign income being converted into its currency.
See it move
Commodities and AUD
Why it matters
These currencies have historically tended to move with commodity prices, so traders watch the two together. The link is loose and can break down for long periods, because interest rates and the general appetite for risk act on the currency too.
Worked example
An example only. The figures are round and invented for the arithmetic: they are not market prices.
A country sells 10 million tonnes of ore abroad each year, priced in US dollars (invented figures).
- 1At 100 US dollars a tonne10 million × 100 = 1 billion US dollars
- 2At 120 US dollars a tonne10 million × 120 = 1.2 billion US dollars
- 3Extra income to convert = 1.2 − 1 = 0.2 billion US dollars
A 20% rise in the ore price means 20% more dollars to be exchanged for the home currency, which is the channel that links the two.
A common mistake
The link is sometimes treated as mechanical, as if the currency must follow the commodity. It is a tendency observed over time, and the two can move in opposite directions for months.
Check yourself
Educational information, not investment advice or a recommendation to trade.