What are Commodities

A commodity is a good used in business or on a market. Each commodity, when traded on an exchange, must meet standards and grades. They may each be slightly different, however, ultimately are the same amongst all producers. There are two different kinds of commodities, soft and hard:

Soft commodities – This refers to items that are grown as opposed to mined. For example, agricultural products such as wheat, sugar , corn, coffee, and more. Produced by farmers, these instruments are highly sensitive to climate and weather changes, and have cyclical dictated by seasons.

Hard commodities – This refers to items that are mined, such as gold, precious metal, other , diamonds and oil, along with other energy product.

Commodity Prices

Various factors can affect the prices of commodities and contribute to their fluctuation significantly. Supply and Demand – If supply and demand balance out, prices should stay the same. However, anytime the market thinks the supply will be lower due to weather or production cuts, prices tend to go higher, and vice versa; higher supplies tent to lead to lower prices. Stock and Inventories – Production of these commodity prices can be affected by the following; weather, crop diseases, production issues with staff, political and economic environments which form additional charges such as taxes, trade laws, subsides from governments etc. Currency Strength – Connections between some of the worlds most traded commodities and are common. For example, the Canadian dollar (CAD) is connected to prices since Canada is a large exporter of oil. If you are aware of these common connections, then monitoring them and trading at the right time are important to making the right decisions in successful trading. It should be noted that most commodities are priced in US dollars, and thus it would be wise to monitor the in order to better forecast the price dynamics. We allow from the same , so you can use these correlations to your advantage. Inflation – When there is inflation, the price of a commodity usually changes accordingly. Don’t forget to check out the to know when the current contracts expire.

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Trading The “Loonie”

Between 1854 and 1914, the Dominion of Canada was under the gold standard. At that time, the value of the Canadian dollar was fixed in terms of , and it was valued at par with the U.S. currency. This marked the beginning of trading between the USD and the CAD. The USD/CAD forex pair is popularly referred to as the “Loonie.” “Loonie” is a colloquial term that refers to the Canadian dollar coin. The Loonie gained its name from the picture of a bird, known as a loon, which appears on the back of the coin. Trading the Loonie requires a deep understanding of the various factors that affect the values of the US and Canadian dollars, both in relation to each other and in relation to other global currencies. For instance, the interest rate differential between the Bank of Canada and the US Federal Reserve will affect the two currencies’ values in relation to each other. Whenever the Federal Reserve intervenes in activities on the open market, in a bid to strengthen the US dollar, the USD/CAD cross will see its value increase because it will take more Canadian dollars to buy a stronger US dollar. The exchange rate of the USD/CAD can also be affected by other economic and political forces on both sides of the border. For example, factors that can impact the CAD include commodity prices, such as oil and zinc, the interest rates of the country as set by the Bank of Canada (BoC), employment rate, national debt levels and budget deficit, as well as the quality of the relations between the US and Canada. Meanwhile, the rate of the USD could be impacted by the interest rates as set by the Federal Reserve, the unemployment rate in the US, the Gross Domestic Product (GDP) growth rates, international trade agreements, duties and tariffs, political events, consumer saving and household income rates and much more. It is also important to also note that the USD/CAD currency pair has a negative correlation to the , and NZD/USD crosses since their quote currency is the USD.

USD/CAD Historical Highs and Lows

There is a high correlation between commodity prices, especially oil, and the value of the CAD. Since Canada’s economy is heavily reliant on oil exports, dictate the health of the Canadian economy and the value of its currency. In 2016, the price of oil slumped to a low not seen in decades, trading at less than $30 per barrel. At this time, the Canadian dollar also sunk to a low of 1.46 CAD to the US dollar. Historically, the Canadian dollar reached an all-time high of 1.61 in January 2002 and a record low of 0.92 in November 2007.

The Effect of The NAFTA Agreement on the USD/CAD

After months of negotiations and fiery rhetoric, the North American Free Trade Agreement (NAFTA) was replaced in September 2018. Rebranded as the USMCA (United States-Mexico-Canada Agreement), the United States and Canada came to an agreement that would see Canada join a trilateral trade pact between Mexico and the United States. Unsurprisingly, the negotiations and the agreement have had a big impact on the money markets in general, and the USD/CAD in particular. During months of negotiations, there was a high degree of volatility with sentiment swaying in favour of the US or Canada, and it affected the value of the currency pair. After the deal was announced, the value of the CAD soared, resulting in a four-month low for the USD. The Canadian dollar rose about 0.7%, reaching a four-month high of C$1.2814, before giving up some gains.

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