Realizing how interdependent and connected some markets are with one another, is one of the most interesting elements of forex trading. The situation of commodity currencies and pairings serves as the ideal illustration of this link.
Many of us were interested when we first learned about the “butterfly effect” in school, back to our earlier years. A minor modification to the starting circumstances might result in a drastically different conclusion, according to the chaos theory. Notably, in the butterfly effect example, the development of a tornado can be impacted by a butterfly that was several weeks in the past and was fluttering its wings.
You might begin to comprehend the butterfly effect by considering why, for example, the Australian dollar has been weak during the recent weeks. The possible failure of Evergrande, the most renowned real estate developer in China, was the main reason.
The Euro / US Dollar example: break-even point
Looking at a more famous circumstances, let’s just have a look at EUR/USD currencies exchange:
EUR/USD began 2022 at $1.1375, down from $1.2275 at the beginning of 2021. Early in February, the price reached a peak of $1.1495 before progressively declining to a low of $1.0380 on May 13—a level last reached in January 2017.
From that low, the price increased to $1.0790 in the beginning of June before declining once more to $1.04. On July 13, the pair temporarily broke over parity as markets responded to US inflation data. A swift recovery ensued, sending the EUR/USD back over $1.0100.
The pair’s year-to-date decline has caused it to trade at the $0.995 mark as of August 24, 2022.
The main reason of this scenario is The invasion of Ukraine by Russia, that has reduced demand for Euro. The war in Eastern Europe has severely hampered the economic prognosis for the eurozone.
Russia’s oil and gas supply, as well as Ukrainian food, are major sources of energy for Europe. The war and Western sanctions against Moscow have driven up the price of food and electricity. The EU approved a phased-in embargo of Russian oil products over the next six months, and prohibited exports as the West works to lessen its reliance on Russian gas and oil.
As a result, the region’s inflation rate reached record highs, which also negatively impacted the prospects for growth.
Conclusions
Therefore, it is not surprising that there are significant correlations between trading items and events, just as there are relationships between currencies and the worldwide pricing of commodities.
The GDP of nations with sizable deposits of commodities is mostly reliant on the export of raw resources. As a result, their economies are susceptible to changes in commodity prices.
So “commodity currencies” refer to be specific because of their dependence on certain commodities.
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