What is Commodity Currency?
A commodity currency is a currency which price is correlated with primary commodity product prices. Commodity currency countries have a heavy dependency on the export of certain raw materials. Commodity currencies are tied to commodities and falling or rising exports will lead to deflation or inflation, currency price will go up or down.
Let us find some examples.
Example 1: Commodity price goes down or up
New Zealand dollar, Australian dollar, Canadian dollar, Norwegian krone, South African rand, Brazilian real, Russian ruble, Chilean peso, etc.. are commodity currencies. As we can we some of this countries are developing countries (eg. Burundi, Tanzania, Papua New Guinea) or strong export countries (NZD, AUD, CAD).
For example, oil “is a “fungible” commodity, which means that specific grades of oil are identical for oil trading purposes, regardless of where they were produced”. Canada exports old. If the price of oil starts to rise, demand raise – Canada will make a profit and CAD will go up. This is just an example, in reality, it is not just that simple.
The price of any commodity or service is determined by supply and demand so very often supply and demand are important for commodity currencies.
Example 2: Supply and demand are changing
China is the biggest producer in the world. If the GDP of China is going lower, production is going down and China will not import commodities from a lot of countries. Than some commodity currencies will go down.