Tag: Commodities

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Forex Assets

Little-Known Tips for Trading Commodities In Forex

Negotiating the realm of raw materials may be new to many of you, but in the end, doing so is very much like negotiating any other financial instrument. The first thing to decide is which broker you will use. There are CFD markets, futures markets, and a variety of options markets that can help you […]

Negotiating the realm of raw materials may be new to many of you, but in the end, doing so is very much like negotiating any other financial instrument. The first thing to decide is which broker you will use. There are CFD markets, futures markets, and a variety of options markets that can help you […]

Negotiating the realm of raw materials may be new to many of you, but in the end, doing so is very much like negotiating any other financial instrument. The first thing to decide is which broker you will use. There are CFD markets, futures markets, and a variety of options markets that can help you access commodity markets. To help you make this decision, just look at how much money you have available to negotiate.

Size Matters (When It Comes to Trading Raw Materials)

Size matters when it comes to raw materials. This is because of futures markets. Futures markets are defined contracts that give you the option to trade several raw materials. To place a transaction in the commodity market of your choice, you need to have the necessary amount of margin to open that position, just like in the Forex world. In this situation is where futures markets could be a little expensive for some people. While some raw materials are cheaper to trade than others, some raw materials require an initial margin of more than 5000 USD for a contract. Beyond that, standardized contracts mean there is only one tick value available. For example, if you sell crude oil, each tick is worth 12.50 USD. There are “mini contracts”, but they are usually not as liquid and are still very expensive for some traders.

This is where CFDs suppliers of raw materials come into play. These contracts allow you to negotiate less than one full contract, mainly because you are not actually operating in the futures market. You are negotiating a contract with your broker to pay or receive the difference between the opening price and the closing price. This is why your broker can offer the equivalent of 1 bale of wheat compared to the standard contract size, for example. In that sense, CFD brokers may be a good option to consider.

A final option may be to trade raw materials in the options markets, but lately, the options have been extraordinarily volatile and costly. Similarly, binary options have had a lot of bad press lately and, in general, can be extraordinarily dangerous because of the large amount of leverage they offer.

The Fundamental Factors Differ

Keep in mind that the fundamental factors in commodity markets can be quite different from the factors you are used to if you are a stock trader or foreign exchange trader. This is because these are real “things” and not necessarily about companies or economies. To take an example, several years ago there was a long series of floods along the Mississippi River and the surrounding area of the United States. This had a great effect on the price of wheat because of the floods they became a problem. The destruction of crops reduced the supply of wheat to the market, which naturally led to an increase in prices.

This is why so-called “soft” commodities in futures markets, which are usually products that grow on the ground, can be a little difficult for some traders to negotiate as weather patterns become very important. Usually, when a currency is traded, you don’t have to worry about the weather, unless there is some kind of anomaly like a tsunami in Japan. In general, climate rarely enters the equation for Forex traders. However, traders in agricultural raw materials trading in wheat, maize, soybeans, and many other products are totally dependent on weather reports.

Precious metals are also a completely different financial instrument, as they often react to interest rate expectations from the Federal Reserve. Similarly, the price of metals is directly affected by the strength of the dollar, as most of the larger precious metal markets are denominated in this currency. This is why it is very important that you have knowledge about how the US dollar has high volatility before trading in gold, silver, or other metals.

The Liquidity Varies

Another thing to consider when operating in commodity markets is the liquidity of the market where it is traded. The fact that your futures broker offers the wood markets does not mean that you should participate in them, as they are very illiquid and are usually used for hedging more than for anything else. This would not be the place for retail traders to participate. There is a contrast with the pair of EUR/USD and you can notice that there is a big difference between the opening and closing a position. Many retailers have been adversely affected by the lack of liquidity in a market they do not understand.

Stick With What’s Important

It’s really funny that I recommend this because I don’t think it’s the case in the currency markets, (although many traders will argue the opposite). This is because the commodity markets have variable liquidity and, if you are involved in a futures contract, that liquidity may hurt you, as the value of the tick may be extraordinarily large in some of these contracts. This is why typical retailers should trade assets such as crude oil, gold, silver, corn, wheat, soy, natural gas, etc. Participating in milk, wood or even palm oil may sound exotic and therefore intriguing, However, it’s an excellent way to lose money.

This does not mean that you cannot deal with these raw materials, but you only need to have the right account size, something that is within the reach of very few retailers. At the end of the day, it is better to stick to markets that are much more stable.

In Summary

Find a broker, one that hopefully is regulated by a strong market authority, or maybe use one that you already have and that offers CFDs markets. As a retail trader, it is much better to initially use the CFD markets, because you can trade penny-worth ticks, compared to those large positions that are required in some of the markets. Remember that technical analysis, to some extent, works the same in all markets. The more liquidity the market has, the more likely the analysis is to work. That is the beauty of some commodity markets like crude oil because they are highly technical in nature.

Fundamental analysis can also be important for the negotiation of raw materials, as mentioned above, and news can also be important. Agricultural markets obviously focus more on climate, while crude oil can focus more on the Middle East. Demand is also a determining factor in the prices of raw materials. Beyond that, I have discovered that commodity trading works in much the same way as foreign exchange trading and is an addition worth considering for your long-term trading plan.

Categories
Forex Course

200. The Correlation Between USD/CAD Pair & Crude Oil

Introduction

Introduction

Introduction

Crude oil, also known as black gold, is the major energy source that runs the economy. Canada is among the top oil producers in the world. It is one of the major oil exporters to the USA. Canada exports more than 3 million barrels of petroleum and oil products, a figure that is sufficient to impact USD/CAD’s movement.

USD/CAD and Crude Oil – The Correlation

The volume of crude oil that Canada exports to the US generate massive demand for the CAD. Moreover, Canada’s economy depends a lot on its exports, and approximately 85% of the country’s exports go to the US.

Therefore, the value of USD/CAD is significantly impacted by how the consumers in the United States reach oil prices. If the US’s demand increases, manufacturers have to order more oil to cater to the rising demand. This can result in rising oil prices, thereby resulting in reducing the value of USD/CAD.

Conversely, if the US’s demand falls, the manufacturer will not need to order in more oil to make goods. Subsequently, the oil prices might fall, which would be bad from the CAD value. So essentially, USD/CAD has a negative correlation.

It’s all about Supply and Demand

Supply and demand are the prominent influencers of the correlation between USD/CAD and crude oil, impacting the demand and supply of US dollars and Canadian dollars.

Export of cruise oil covers a significant percentage of the US currency acquired by Canada. This means that a shift in the price and volume of crude oil will have a considerable impact on the flow of the Greenback into the Canadian dollar.

Furthermore, high crude oil prices also imply a higher flow of USD into Canada due to its exports. This implies that there will be a strong supply of the USD into the Canadian dollar, thereby increasing the value of the Canadian dollar.

Similarly, when the crude price falls, the US dollar supply will be lowered as opposed to the Canadian dollar, leading to a decreasing value of the Canadian dollar.

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Forex Course

199. Effects Of Gold On AUD/USD & USD/CHF Currency Pairs

Introduction Gold is among the most traded commodities globally due to the good intrinsic value of this asset. Considering that Gold is less impacted by uncertain conditions, its prices rise when other economies perform badly and fall when there is an economic boom. Gold impacts AUD/USD and USD/CHF in opposite manners. Price fluctuations in Gold […]

Introduction Gold is among the most traded commodities globally due to the good intrinsic value of this asset. Considering that Gold is less impacted by uncertain conditions, its prices rise when other economies perform badly and fall when there is an economic boom. Gold impacts AUD/USD and USD/CHF in opposite manners. Price fluctuations in Gold […]

Introduction

Gold is among the most traded commodities globally due to the good intrinsic value of this asset. Considering that Gold is less impacted by uncertain conditions, its prices rise when other economies perform badly and fall when there is an economic boom.

Gold impacts AUD/USD and USD/CHF in opposite manners. Price fluctuations in Gold primarily impact three major currencies that include AUD, USD, and CHF. Let’s discuss how Gold affects AUD/USD and USD/CHF.

The Effect of Gold in AUD/USD

When the price of gold rises, the AUD/USD will move upwards. These two aspects share a positive correlation; most of the time, they move together. An increase in the U.S. dollar generally contributes to the gold prices to fall and vice versa. The price of Gold perfectly depicts the economic health of the country.

During an economic crisis in the country, investors purchase Gold as protection from inflation or an economic crisis. But the inner value of the Gold does not change whether or not there is a crisis. Furthermore, gold value is displayed in the dollar, meaning every gold transaction, you spend/receive a dollar.

Australia’s Economy and its Impact on Gold Prices

AUD and Gold share a positive relationship and are inversely related to the USD. If the gold price rises, the Australian exports will increase, resulting in the expansion of the economy and foreign investment. When the gold price increases, the AUD/USD will move upwards because of the increasing demand for the AUD.

Impact on the USD/CHF

The Switzerland currency holds a positive correlation with Gold. This is because 25% of CHF is supported by the gold reserves. The refineries in Switzerland also process 70% unrefined gold every year. Additionally, Gold and CHF are inflation hedging during uncertain times.

Therefore, when the price of gold increases, the CHF value also appreciates or increases, vice-versa. Gold has a positive relationship with CHF and an inverse relationship with USD/CHF. When the price of gold rises, the value of USD/CHF falls down and vice-versa.

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Forex Fundamental Analysis

Impact of ‘Commodity Prices’  On The Forex Market

Introduction

Introduction

Introduction

Thanks to international trade, some countries prosper disproportionately than others. The disproportionality in the balance of payments is mostly owed to the type of exports a country produces. Countries that are net exporters of precious commodities tend to have a better balance of payment than net importers. For this reason, the fluctuation of these commodities tends significantly affect their economy.

Understanding Commodity Prices 

A commodity can be defined as any physical product that can be traded in any form of exchange. With commodities, there is little differentiation, if any, regardless of where they originate. For example, we can say that an ounce of gold from South Africa is the same as an ounce of gold from Australia.

Naturally, different parts of the world are endowed with different types of natural resources. Furthermore, since commodities are inherently used to produce other goods and services, their value entirely depends on their rarity and demand. Take Copper and Wheat, for example. Both are commodities. But you cannot compare the value of a kilo of copper and a kilo of wheat. Copper is a rare and limited precious commodity, while wheat is readily cultivated. Therefore, a country that is a net exporter of copper will have a better balance of payment than a country that is a net exporter of wheat.

Furthermore, let’s take an example of country A with the largest deposit of commodity X in the world. In this case, country A is basically a monopoly; if it wanted to control the commodity prices, it would reduce the production of the commodity. By doing so, the demand for commodity X would exceed the supply, which means that country A will receive higher prices. Now, imagine a scenario where vast deposits of commodity X are discovered in country B. It now means that the supply of commodity X in the international market will increase, and as a result, the price of commodity X will decrease.

For countries whose economies heavily dependent on commodity exports, the fluctuation of commodity prices heavily impacts the earnings. Furthermore, the changes in the demand for these commodities also affect the GDP of these countries. Note that the price of these commodities also varies depending on their quality. For commodities which are used for trading in the future market, the minimum quality accepted is called the basis grade,

Using Commodity Prices  in Analysis

The commodity prices usually tend to impact the economies which heavily rely on the export of commodities to fund public expenditures.

An increase in commodity prices means that the producing country will receive more income. In turn, this translates to increased wages for workers involved in the production or mining of the commodity. Since households are well compensated, their welfare will significantly increase. Note that for countries heavily dependent on commodity exports, these commodities’ mining or production usually employs a majority in the labor market. Therefore, an increase in wages will significantly impact the changes in the aggregate demand in the economy for consumer goods and services.

This increase in demand tends to lead to an increase in the production of consumer goods. As a result, there will be an expansion of the consumer industry. More so, the expansion of these sectors leads to more job creation hence lowering unemployment levels. Other sectors of the economy will also benefit from this increase in wages. The real estate sector will also flourish since the increase in wages means that households can now afford to fund the purchase of homes or qualify for mortgages.

Conversely, a decline in the prices of commodities means that the labor involved will be compensated lesser. The resultant effect will be a contraction in demand for consumer goods and services since households will be forced to prioritize expenditure on essential products. Consequently, the consumer discretion industry will contract as producers scale down operations to match the decreased demand. As a result, some jobs in these sectors will be lost, contributing to increased unemployment. Therefore, we can see there is a direct link between the changes in commodity prices to the growth of the domestic economy and changes in the domestic employment levels.

Let’s look at another scenario. Say the economy of country A is intertwined with that of country C – country A imports multiple commodities from country C. Since country A’s economy heavily relies on commodities, the prices of these commodities increase, which means that the balance of payment of country A improves and that its citizens are well off. Thus, country A can afford to import more products from country C. therefore, country C’s economy will prosper. Increased imports from A means that production in C will increase, expand its economy, and improve labor market conditions.

Conversely, when commodity prices fall, it means that economic conditions in country A might deteriorate. Consequently, imports from country C will decrease, leading to either C’s economy to contract or a slowdown in its growth. This is usually the case with Australia and New Zealand, whose economies are close to each other.

Source: St. Louis FRED

Therefore, commodity prices do not just affect the economy of countries whose exports are majorly comprised of commodities.

Impact on Currency

The impact of the changes in the commodity price in the forex market is pretty straightforward.

When a country exports a commodity to the international market, it is paid in its currency. Therefore, when the commodity prices increase, it means that the domestic currency will be in high demand. Importers of the commodity will have to convert more of their currencies into the domestic currency. As a result, the value of the domestic currency will appreciate relative to other currencies.

On the other hand, a fall in the commodity means fewer amounts of the domestic currency will be required to purchase the exports. Consequently, the domestic currency will marginally depreciate relative to others.

Sources of Data

In Australia, the Reserve Bank of Australia publishes the Index of Commodity Prices report monthly.

Source: RBA

Trading Economics has a comprehensive list of commodity prices in both the spot and futures market.

How Commodity Prices Data Release Affects The Forex Price Charts?

The latest publication of the Index of Commodity Prices report by the RBA was on October 1, 2020, at 6.30 AM GMT and can be accessed at Invetsing.com. The release of the commodity prices is expected to have a low impact on the AUD.

In September 2020, the YoY the Australian commodity index decreased by 5.8% compared to a 10.2% decline in the YoY index for August 2020.

Let’s see if this release had an impact on the AUD.

GBP/AUD: Before Commodity Price Release on October 1, 2020, 
just before 6.30 AM GMT

The GBP/AUD pair was trading in a neutral pattern before the publication of the Australian commodity index. The 20-period MA was flattened with candles forming just around it.

GBP/AUD: After Commodity Price Release on October 1, 2020, at 6.30 AM GMT

The pair formed a 5-minute bullish candle when the commodity prices were released. Subsequently, the 20-period MA steadily rose with candles forming above it, showing that the AUD weakened against the GBP.

Bottom Line

In Australia, commodity exports account for about 50% of the export income. While this report plays a vital role in forecasting the Australian economy, it is a low-impact economic indicator in the forex market.

Categories
Forex Assets

An Overview of the Commodity Markets

Introduction
Trading that deals with raw materials, either manufactured or available as natural resources, are known as commodity trading. Investors, today can access around 50 major commodity markets. These are

Introduction
Trading that deals with raw materials, either manufactured or available as natural resources, are known as commodity trading. Investors, today can access around 50 major commodity markets. These are

Introduction

Trading that deals with raw materials, either manufactured or available as natural resources, are known as commodity trading. Investors, today can access around 50 major commodity markets. These are further divided into soft commodities and hard commodities. Hard commodities are natural resources that are mined or extracted, such as gold, silver, and oil. Soft commodities are agricultural products or livestock such as corn, coffee, sugar, and wheat.

Traders can invest in commodities in multiple ways. The most popular method of investing in commodities is by buying a futures contract. You also can purchase commodities through ETFs. Some of the U.S. commodity exchanges are the Chicago Mercantile Exchange, Chicago Board of trade, New York Board of Trade and New York Mercantile Exchange.

Different categories of commodities

Agricultural commodity trading

The commodities that fall under this category are sugar, coffee, cocoa, cotton, corn, and wheat. Many assume that agricultural markets are not thickly traded, but that’s a myth. In fact, coffee is the second largest commodity in the world, after oil.

The factors which impact the price of agricultural commodities are supply/demand, weather, trade agreements with other nations, new technology, taxation, etc. There are regulatory bodies that decide how a particular commodity should be produced and sold.

Energy commodity trading

This is an extremely popular category of commodities that includes Brent crude oil, WTI crude oil, gasoline, and others. The reason why these commodities are important is that they are an integral part of numerous industries. They have the power to move an entire economy. For example, an increase in oil prices will affect aviation companies, paint industries, tire companies and many more.

Countries like Russia and Saudi Arabia heavily depend on oil for revenues. Factors such as supply and demand play a major role in determining oil prices. Some other factors (which are specific to oil) include OPEC (Organization of the Petroleum Exporting Countries) meeting outcome, political statements, International agreements, etc.

Metal commodity trading

This category includes precious metals like Gold, Silver, Platinum, and Palladium. Earlier trading in precious metals was only possible by rich investors, but now with the introduction of CFD trading, traders can easily invest in metals along with wide leverage options. Supply and demand once again affect the prices of gold and other metals. Other factors include economic changes in China and India (as they are the world’s largest consumers), taxation, and Federal reserves’ interest changes.

Commodities on Forex Brokers 

Despite the fact that Forex is primarily a market for trading a variety of currencies, most Forex brokers offer a wide range of other various trading assets to their customers. By doing this, these brokers are helping their customers in diversifying their investments.

Currency trading brokers allow trading precious metals such as gold, silver, and platinum. Traders can also invest in energy commodities that include crude oil and natural gas. Forex brokers that provide commodity derivatives and CFDs are getting more and more popular and in-demand than the brokers who deal with only currencies and nothing beyond.

Guidelines to Commodity Trading

Novice traders should look at broad trends while investing and trading individual commodities. They could look at levels of crops being produced, metals being mined, and the oil extracted. Because these factors can give them clues about the direction of the market. Similar to this, inventory levels can also be a great tool for analyzing commodity markets. Continuous drawdown in inventory levels can lead to higher prices, while inventory buildup can lead to lower prices.

Technical analysis is another widely used method to trade commodities. This type of analysis uses historical prices and trends to predict the future. True technical traders do not pay any attention to fundamental factors but just price-action. But, our recommendation is to look at both fundamental factors and technical analysis in order to get the best trading results while dealing with commodities.

We hope you had a good read. If you have any questions, let us know in the comments below. Cheers!

Categories
Forex Market

Everything You Need To Know About The Forex Currency Pairs

In the previous articles, we have discussed the overview of the Forex industry as a whole. In this article, let us understand in detail about the currency pairs which Forex

In the previous articles, we have discussed the overview of the Forex industry as a whole. In this article, let us understand in detail about the currency pairs which Forex

In the previous articles, we have discussed the overview of the Forex industry as a whole. In this article, let us understand in detail about the currency pairs which Forex is fundamentally about.

How does it work? 

A currency pair is a code representing the interaction of two different currencies. In that pair, the first currency is known as the Base currency, and the second one is called the Quote currency. When you are buying a currency pair, you are essentially buying the base currency and selling the quote currency. It is vice-versa for selling.

When you see a currency quoted as 1.32., it means you can exchange 1 unit of base currency for 1.32 units of the quote/counter currency. When the value of currency changes, it is always relative to another currency. If the value of GBP/USD changes from 1.26345 to 1.26460 the next day, it means that the Pound has appreciated relative to U.S. dollar or U.S. dollar has depreciated relative to Pound as it will cost more USD to purchase 1 Pound.

What are the major currency pairs?

The most liquid currency pairs are known as major currency pairs. These are the pairs where USD is involved either as a quote currency or base currency. Some of the most popular currency pairs include EUR/USD, USD/JPY, GBP/USD, USD/CHF, and USD/CAD. They represent some of the largest economies of the world and are traded in high volumes. These currencies also have low spreads, which is good for traders.

Minor or cross-currency pairs

Cross-currency pairs are nothing but the crosses of major currencies. They do not include the USD in them. Some of the popular cross-currency pairs include EUR/GBP, EUR/JPY, and EUR/CHF. Even though the trading volume of these pairs is significantly low compared to the major currency pairs, they do contribute with a large amount of volume to the Forex market. Let’s understand more about the volatilities and preferences of these minor currencies.

  • Predicting the EUR/GBP currency pair is most difficult compared to other currencies.
  • Traders prefer trading EUR/JPY as they believe it is easier to forecast, thus making it a popular cross-currency pair.
  • EUR/CHF is also popular because of the fact that the Franc is a safe-haven currency. It is traded during times of high volatility.

Here we have only discussed the EUR crosses. We recommend you to explore more cross-currency pairs and understand each of their volatilities. There is another type of currency pair known as Exotics. In this type of currency pairs, one currency is Major while the other an upcoming currency. Examples – USD/TRY & USD/MXN.

Commodity currencies

Australian dollar and New Zealand dollar are the currencies that are greatly influenced by commodity prices. The Australian dollar is greatly affected by mining commodities, beef, wool, and wheat. Aussie (AUD) is strongly influenced by China as these two countries are huge trading partners. USD/CAD is also one currency that is affected by commodities like oil, timber, and natural gas. The Canadian dollar price movement is strongly related to the U.S. economy. New Zealand, however, is heavily influenced by news release of agriculture and tourism. Along with commodities, the effect of central banks and reserve banks shouldn’t be underestimated. Changes in monetary policy from either of the country’s banks will lead to huge volatility.

The point we are trying to make here is that each of the currency pair’s price movements is influenced by some of the other external factors. As you start your journey in trading Forex markets, you will understand these influencing factors in detail.

What moves these currency pairs?

As discussed above, there a lot of independent factors that move the price of these currencies. But the fundamental factors are interest rates, economic data, and politics. Let’s understand these in detail.

Interest rates – Central banks raise or reduce interest rates to maintain financial stability. This increases demand for currencies whose interest rates are high, as investors get a higher yield on their investments.

Economic data – Economic releases are reports that give a glimpse of the nation’s economy. Relevant economic data include CPI, Non-farm payroll, GDP, Retail sales, and PMI. This data will have a positive or negative effect on that country’s currency.

Politics – Trade wars, elections, and changes in the ruling government introduce instability, which reflects in the Forex market. The decision the government’s take can boost or depreciate the economy.

Which currency pair should you trade? 

If you are new to forex, choose the currency pair which has the most liquidity. Always start with Major pairs before exploring the others. Analyze the fundamentals of a currency. If you know technical analysis, you can combine it with technical indicators to know and understand when to trade. Do not use leverage; even if you do, use appropriately so that you don’t wipe out your account. To learn more about Forex trading from the very basics, you can sign-up for our free Forex course here. Cheers!