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Understanding commodity currencies

One of the most exciting aspects of forex trading is realising how dependent and correlated some markets are to each other. The case of commodity currencies and pairs is a perfect example of such correlation. 

 

Going back to our school years, many of us were left intrigued when we first heard about the ‘butterfly effect’. According to the chaos theory, a tiny change in initial conditions can create a significantly different outcome. Notably, in the butterfly effect illustrative example, the formation of a tornado can be influenced by a distant butterfly flapping its wings several weeks before. 

 

With the butterfly effect in mind, you can start to understand why, for instance, the Australian dollar has remained weighed down over the past weeks on the potential collapse of Evergrande, China’s most prominent property developer.  

 

So, it’s no surprise that there are strong correlations between different products and events in trading, just like certain currencies are linked to the global prices of primary commodity products. 

 

Countries with large commodity reserves are heavily dependent on the export of raw materials for their GDP. So, such economies are sensitive to changes in commodity prices. 

 

The dependency of specific currencies on commodities is what makes them a ‘commodity currency’. 

Understanding commodity currencies

The 3 top traded commodity currencies

The currencies with the closest commodity correlations are the Canadian dollar (CAD), the New Zealand dollar (NZD)  and the Australian dollar (AUD). Paired to the US dollar, these are called ‘commodity pairs’ and are among the most widely traded currency pairs. 

 

Australian Dollar (AUD)

 

The AUD currency is also known as the ‘Aussie’. Australia is one of the most resource-rich nations on the planet. As a result, Australia’s currency is heavily dependent on commodity prices, as it exports coal, iron ore, petroleum and gold.

 

Australia’s economy is tied with China’s economy. China is the global manufacturing and industrial growth giant and therefore depends on Australia’s primary commodities. 

 

Canadian Dollar (CAD)

 

The CAD currency is also known as the ‘Loonie’. Canada is the fifth-largest oil producer globally; therefore, the price of oil is a significant driver in the Canadian economy’s health. 

 

Canada’s economy is tied with the US economy, with approximately 75% of Canadian exports going to the States.

 

New Zealand Dollar (NZD)

 

New Zealand has a solid connection to gold and will react to movements in the commodity’s price. Also, New Zealand is the globe’s biggest exporter of milk products and exports other farm products such as meat and wool. 

Like the Australian dollar, the New Zealand dollar (also known as the ‘kiwi’) is affected by China. This is because China imports vast quantities of dairy products from New Zealand; therefore, kiwi’s value is linked to the volume of dairy products exports.

Other currencies with commodity price correlations include the Russian ruble (RUB), the Brazilian real (BRL) and the Saudi riyal (SAR). 

Why and how to trade commodity currencies

So, why do commodity-linked currencies attract traders? 

 

The nature of the commodity currencies allows forex traders to move in and out of trades quickly. Moreover, commodity currency traders can take advantage of the commodity price fluctuations. 

 

Some of the price movers of the commodity currencies include macro and monetary policy events and decisions. In fact, any event that can impact a commodity’s price can affect commodity currencies as well. For example, OPEC meetings, market sentiment, central bank policies and political tensions list factors affecting commodities and commodity currencies.   

 

Do you feel like it’s high time to trade commodity pairs along with the majors, minors, and exotics we offer? Then, just open an account with Eurotrader and enjoy our competitive spreads and super-fast execution.

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Jargon

The most confusing Trading & Finance Jargon in 2021

Trading gets more and more popular every year, particularly as a growing number of young adults take more of an interest in personal finance. But as many new traders will quickly learn, trading and finance have a lot of their own terminology, and it certainly helps to know them!

Because we’re so nice, we went away to find out the trading and finance terms causing the most confusion, and we’ve listed the top 10 alongside their definitions to help you out.

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Why is the DAX30 changing to DAX40?

Thirty-three years following its birth, in July 1998, DAX30 has decided to grow up. As an adult child, Germany’s flagship stock index is not leaving the nest – it’s just bringing new additions to the family.

 

Deutsche Börse – the company behind the index – has decided that 10 more companies would join the nation’s premier DAX. The newcomers are largely known businesses expected to strengthen the benchmark and increase its quality. 

 

The DAX shake-up was decided in the wake of the Wirecard scandal. The German payments firm was suspected of fraudulently inflating its balance sheet. As a result, the financial services provider was the first DAX company to file for bankruptcy. 

 

The reform aims to guard the blue-chip index against any Wirecard-similar future crisis.  At the same time, the makeover is to align the German index with its international peers and attract global investors. 

 

As well as the debut of the 10 new companies into the German stock market barometer, a new regulatory framework and further structural reforms will also be implemented.

 

A transitional period will be put in place to give the index’s existing companies time to comply with the new regulations by September 2022.

Why is the DAX30 changing to DAX40

Which are the new kids on the block?

The admission of the new members will be completed by September 20, 2021, and is based on new entry criteria. Newcomers will cover a broader range of sectors, and the index will probably get a growth boost.

 

The DAX30 (DE30) will re-weight to include the following companies from the mid-cap universe (MDAX):  

 

  • Airbus [AIRG.DE] – an aerospace manufacturer
  • Zalando [ZALG.DE] – a multinational ecommerce fashion retail platform
  • Siemens Healthineers [SMMNY] – a medical services, products and solutions provider
  • Symrise [SY1G.DE] – a producer of flavours and fragrances
  • HelloFresh [HFG.DE] – a meal kit provider
  • Sartorius [SRT.F] – a pharmaceutical and laboratory equipment supplier
  • Porsche Automobil [PSHG_P.DE] – an automobile manufacturer specialising in high-performance sports cars
  • Brenntag [BNRGn.DE] – a chemical distribution company
  • Puma [PUM.DE] – a multinational corporation designing and manufacturing athletic and casual footwear, apparel and accessories
  • Qiagen [QIA.DE] – a provider of sample and assay technologies for molecular diagnostics

Interestingly, trading volume will no longer be the main criterion for ranking. Instead, as well as demonstrating market capitalisation credentials, companies entering the DAX40 (DE40) need to have been profitable for the last two years before their admission. Another requirement is positive EBITDA in the two most recent annual financial statements of the companies. Then, companies will need to submit annual financial statements and quarterly reports on time following their access.  

How might the DAX30 reform impact traders?

The new DAX will be a better reflection of corporate Germany, focused mainly on growth, meaning the dynamic of the index may change. More stocks will lead to higher trading volumes and, eventually, more liquidity.

 

More stocks also means higher diversification, although the big companies will still have the highest impact, so any change at the top of the index won’t be significant. On the other hand, big companies with considerable index weighting may influence the DAX’s moves less.

 

The reform will also mean that the MDAX will lose the companies that represent almost half of its market capitalisation. This would potentially lead to reduced liquidity.

 

In a press release, Stephan Flaegel, Chief Product Officer, Indices and Benchmarks at Qontigo, said:

 

We are completing the biggest DAX reform in our history, manifesting the DAX as the German Blue Chip index, which will represent a larger spectrum of the German capital market. The qualitative improvements and alignment with international standards are largely owed to feedback from market participants. Together, we have put the DAX index family in the best possible position for the future.”

 

To practise trading on the DAX index plus all the new DAX arrivals as stock CFDs, open an account and start your Eurotrader journey today.

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NFT

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