Commodity currencies are the most liquid, with huge commodity reserves. Commodity currencies from countries with significant stockpiles of commodities are known as FX commodities. The fluctuations in commodity prices are often related to changes in country money supplies, as nations produce and export a variety of commodities. Many investors looking to benefit from changes in commodity prices invest indirectly by purchasing commodity currency pairs. The most popular FX commodities are the EUR/USD, USD/JPY and GBP/USD.
Many factors can affect the prices of FX commodities, including economic indicators, political events and central bank policy. To make money from trading FX commodities, you must understand these factors and how they can impact prices.
The following are some of the top FX commodities to trade in Singapore:
EUR/USD
The EUR/USD is one of the most popular currency pairs to trade, as it offers a variety of profit opportunities. The EUR/USD is influenced by several factors, including interest rates, inflation and GDP.
USD/JPY
The USD/JPY is another favoured currency pair to trade, as changes often influence it in the stock market. The USD/JPY is also influenced by the interest rate differential between the United States and Japan.
GBP/USD
The GBP/USD is another favoured currency pair to trade, as it can be affected by several political and economic events. For example, the Brexit vote in 2016 caused significant volatility in the GBP/USD.
AUD/USD
The AUD/USD is another preferred currency pair to trade, as it tends to be influenced by commodity prices. For example, when gold prices rise, the AUD/USD often follows suit.
NZD/USD
The NZD/USD is another currency pair to trade, as various economic indicators can impact it. These include interest rates, inflation and GDP.
USD/CAD
The USD/CAD is another top currency pair to trade, as changes often influence commodity prices. For example, when crude oil prices rise, the USD/CAD usually falls.
How do various factors affect FX commodities?
Interest rates
The interest rate divergence is one of the most important factors that move FX commodities. When the interest rate in one country is higher than in the other, it will often lead to an appreciation in the currency. For example, if the US interest rate is 2% and the Japanese interest rate is 0%, USD/JPY will likely rise as investors seek to benefit from the higher return.
Inflation
Inflation can also significantly impact FX commodities. When inflation is high, it often leads to a depreciation in the currency because high inflation erodes the purchasing power of the currency. For example, if inflation in the United States is 3%, while inflation in Japan is 0%, USD/JPY will likely fall as the value of the dollar decreases.
GDP
GDP is another crucial factor that can affect FX commodities. When a country’s GDP grows, it often leads to an appreciation in the currency because a strong economy indicates that the country is doing well and can pay its debts. For example, if the United States has a GDP growth of 3% and Japan has a GDP growth of 0%, USD/JPY will likely rise as investors seek to benefit from a more robust economy.
Political events
Political events can also significantly impact FX commodities. For example, the Brexit vote in 2016 led to a sharp decline in the GBP/USD as investors sought to sell the pound.
Central bank policy
Central bank policy can also affect FX commodities. For example, if the US Federal Reserve raises interest rates, it will often lead to an appreciation in the USD/JPY as investors seek to benefit from higher returns.
Risks of trading FX commodities
Leverage
Leverage is one of the most significant risks when trading FX commodities because it allows investors to control a large amount of money with a small amount of capital. It can lead to significant losses if the market moves against the investor’s position.
Liquidity risk
Liquidity risk is another risk when trading FX commodities because some currency pairs are not as liquid as others, making it difficult to exit a position.
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