Forex Fundamentals: Event-driven Trading Strategies And Commodity Currencies

In the foreign exchange market there are three currency pairs that are commonly referred

to as the "commodity currencies," which are the USD/CAD, AUD/USD and the NZD/USD. The reason for this nickname is that the economies of Canada, Australia, and New Zealand are largely based on their commodity markets (such as oil, timber, and agriculture) and during times of economic duress it is common for traders to move their money from the US dollar into these currencies to try and hedge any potential losses. Due to the nature of these three currency pairs as well as their average market trading volume, they can present a unique opportunity for fundamental traders.

Due to the high amount of liquidity for a currency pair such as the EUR/USD (which is the most highly traded currency pair in the world), a large buy or sell order in the billions is usually easily absorbed into the market without a large effect on the current exchange rate levels. These three commodity currency pairs, however, have much lower daily trading volume than the Euro vs the US dollar, and so a similar order of an equally large size could have a much larger effect on the exchange rate. Now while it is true that all currency pairs are going to have traders who place their trades based on technical signals, a disproportionately large amount of trading activity in the commodity currencies is event-driven, meaning that it is prompted by a fundamental announcement of some kind.

Canada, Australia, and New Zealand all have there own financial institutions and central banks, and each of them also has a handful of economic policy agencies that release reports on a quarterly or monthly basis. If there is a significant announcement by any one of these agencies (such as a change in the current interest rates), or an economic report comes out with a great degree of variance from expectations, this can prompt a large and quick amount of buying or selling pressure into the given currency. But when such economic reports come out in the United States (since each of these currency pairs has a USD component) this can prompt buying and selling pressure across all three of these pairs.

Since price action in these currency pairs is of a fundamental event-driven nature, this can mean two important things for traders looking to capitalize on these movements: rapid changes in bullish or bearish sentiment will create rapid price movements which can present a good day trading opportunity, and also these rapid changes can also create price gaps which can temporarily decrease liquidity, increase spreads (depending on your software platform), and create potential price slippage situations. The lessons to be learned here are that these three "commodity currency" pairs have a larger-than-normal reaction to fundamental announcements, and that most traders are making their buy and sell decisions on an event-driven basis which means swift price movements and good day trading opportunities.

by: Ricky Weber

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