Forex Fundamentals – Event-pushed Trading Strategies and Commodity Cur…

In the foreign exchange market there are three money 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 shared for traders to move their money from the US dollar into these currencies to try and hedge any possible losses. Due to the character of these three money pairs in addition as their average market trading quantity, they can present a rare opportunity for basic traders.

Due to the high amount of liquidity for a money pair such as the EUR/USD (which is the most highly traded money 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 money pairs, however, have much lower daily trading quantity 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 money 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-pushed, meaning that it is prompted by a basic announcement of some kind.

Canada, Australia, and New Zealand all have there own financial institutions and central edges, 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 meaningful 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 money. But when such economic reports come out in the United States (since each of these money pairs has a USD part) this can prompt buying and selling pressure across all three of these pairs.

Since price action in these money pairs is of a basic event-pushed character, this can average 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 decline liquidity, increase spreads (depending on your software platform), and create possible price slippage situations. The lessons to be learned here are that these three “commodity money” pairs have a larger-than-normal reaction to basic announcements, and that most traders are making their buy and sell decisions on an event-pushed basis which method rapid price movements and good day trading opportunities.

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