A commodity currency is the currency of a country that has lots of natural resources like oil or precious metals. Commodity currencies are desirable when commodity prices are high because these currencies tend to appreciate in value during these times. For this reason, commodity currencies can also offer an investor some inflation protection.
Commodity currencies include the Canadian dollar (CAD) and the Australian dollar (AUD), among others. One of the issues with commodity currencies is that they tend to overreact to market fluctuations in the commodity that they are connected with in forex traders’ minds. A relatively small change in the price of oil will have a larger effect on the CAD because traders will react by taking up positions that are further amplified by leverage. Commodity currencies can act as safe haven currencies in times of economic uncertainty, but they generally rank below more traditional safe havens like the U.S. dollar, Japanese yen and Swiss franc.
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