Commodity currency refers to the physical commodity that has value in itself. Its commodity value is equal to the currency value and can be used as a medium of exchange.
Commodity currencies are currencies with physical backing, such as gold and silver, and currencies under the gold standard, such as the U.S. dollar under the Bretton Woods system.
It’ s is another type of currency other than fiat currency, and currency also has its inherent fundamental value outside the guarantee of the government.
Commodity currencies move in relation to global price movements of major commodities as certain countries rely on the export of raw materials for their incomes.
Commodities include minerals such as copper, iron ore and coal, energy products such as oil and natural gas, precious metals, and dairy products such as milk.
Commodity currencies mainly exist in countries such as Australia, New Zealand, Brazil, South Africa and Russia, whose economic performance is closely related to commodity exports.
The Major Commodity Currencies
The top three commodity currencies with the highest correlation to commodities and the most widely traded are CAD, AUD and NZD.
The yen is also considered a commodity currency. In order to meet the domestic nuclear power capacity, Japan needs to import a large amount of crude oil. Therefore, the yen will be affected by changes in oil prices.
In addition to these three common currencies, the South African Rand and the Norwegian Krone are also habitually called commodity currencies.
The main features of commodity currencies are high interest rates, a high proportion of exports to GDP, major producers and exporters of an important primary product, currency exchange rates that move in the same direction as a commodity (or gold price), and so on.
For example, Australia and New Zealand are rich in coal, iron ore, copper, aluminum, wool and other industrial products and cotton textiles. Therefore, Australia has an absolute advantage and a dominant position in the international trade of these products.
The prices of these products in the international market are basically denominated in US dollars. Therefore, the rise in the prices of these commodities is not only conducive to the economic growth of the region, but also to the rise of the local currency exchange rate.
At the end of last year, gold, oil prices and agricultural products rose sharply, and the international commodity futures price index (CRB) also rose to a five-year high, pushing up the exchange rates of the Australian dollar and New Zealand dollar.
Statistics and graphs show that world commodity prices have a strong positive correlation with the movements of the Australian dollar and New Zealand dollar exchange rates. Although Australia and New Zealand are not important producers and exporters of gold, the positive correlation between the currency exchange rate of the two countries and the price of gold is obvious.