Commodity currencies are most common in developing countries like Tanzania, Papua New Guinea, and Burundi. However, they are far from limited to...
Not to be confused with commodities (like gold) used as currency, commodity currencies are currencies that fluctuate with the price of a primary commodity on which the country’s economy is heavily dependent on the export of. Commodity currencies are most common in developing countries like Tanzania, Papua New Guinea, and Burundi. However, they are far from limited to developing countries. For example, Canada, Australia, and New Zealand all have commodity currencies.
Usually, the commodity which is linked to the currency is a natural resource like gold and other minerals, oil, and timber. For example, the Canadian dollar is linked to the export of soybeans and oil. Given the fact that commodities are almost always natural resources, formally linking them to a currency can be a benefit to the environment. This formal link holds countries more accountable and enforces higher environmental standards for things like pollution in the mining of the resource. There are some countries with currencies informally and unofficially tied to a natural resource, but are not held to the same environmental and sustainability standards. Countries with commodity currencies are not able to cut costs by cutting corners when it comes to extracting that resource.
Like anything, there are pros and cons to commodity currencies. If the demand for the product is high, the value of the currency increases, and with it, the country’s GDP (gross domestic product). This can be a great benefit to the country’s economy. However, likewise, if the demand for the product decreases, so too does the currency and GDP deflate.
Many forex traders find commodity currencies easier to predict and track – just follow the commodity. The added indicator makes commodity currencies a safer gamble when investing in foreign exchange.
