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What are Comdolls Currency Pairs?

By Louis Holding-Parsons on March 27, 2019

5 (100%) 1 vote[s]

The comdolls is short for commodity dollars and is used to refer to currencies whose underlying economy is dependent on the price of a commodity. Major currencies associated with the term comdolls are the Australian, Canadian and New Zealand dollar. The Norwegian Krone is also sometimes included in this group due to oil being an important part of Norway’s economy. 

Comdolls benefit from world economic growth

Investors often need to get their hands on comdolls if they want to trade commodities. This is why the comdolls’ price action is often correlated with commodity prices. Since their economies rely on exporting commodities, their currencies tend to react to trends in commodity prices. In periods of world economic growth, oil tends to rise as countries trade more with each other. This drives oil exporting currencies such as Canadian Dollar (CAD) and Norwegian Krone (DKK) higher. This also applies to other commodities such as iron ore, which is a key ingredient for large infrastructure projects.

Which commodity affects which currency

Oil:

Oil a commodity which influences the price of the ComdollsBoth Canada and Norway have huge oil reserves which contribute a great deal of tax revenue to their respective governments. Lower demand for oil, usually causes the oil price to drop. In turn this usually results in their respective currencies losing value, as fewer people are buying their oil. Norway has made so much money from oil that it has even created a sovereign wealth fund to invest in the country’s future. The current ‘lower for longer’ oil price over the past few years has affected the budgets of many countries. A perfect example would be Saudi Arabia. This has also reduced the sanctioning of new oil wells, which could mean a lack of oil in future, pushing prices higher again!

Iron ore:

Australia is one of the world’s highest exporters of Iron ore. China has been a key client in recent years due to its huge infrastructure building programs. During the 2008 financial crisis, Australia was somewhat immune due to the large orders emanating from the Chinese. This gave the Aussie dollar (AUD) strength, especially as it was seen as a stable currency compared to many previously perceived strong ones such as pound Sterling and the Euro.

Milk…

Anyone with an interest in sport will know the All Blacks teach the rest of the world how to play rugby. Yet anyone reading about their players will sometimes hear one referred to as having ‘farm strength’. This is referring to New Zealand’s economy being dependent on the price of milk, from the large amount of sheep they have! In fact there are more sheep than humans in New Zealand. Milk is their biggest export. This commodity’s price can be easily influenced by a sudden drop in demand from one key client: China.

Distinctive comdolls correlations

Comdolls are influenced by price of oil which is priced in dollars

Some currency pairs will have distinctive correlations to certain currencies. For example, the EUR/USD is positively correlated with gold and negatively correlated with the USD. Oil is positively correlated with USD as it is priced in dollars. Canada is the biggest exporter of oil to the US, as a result the CAD/USD is negatively correlated to the oil price. As the oil price rises, then the demand for CAD reduces due to its expensive price. This reduces the demand for CAD, leading to its depreciation. It should be appreciated that correlations can uncouple themselves from time to time.

The AUD/NZD are currencies which are popular for carry trades as both yield higher interest that many other major currencies. Their popularity for carry trades is also influenced by the predictive nature of their economies in times of economic expansion. A typical comdolls trade!

Conclusion

Many reading this article will fundamentally be interested in Forex trading and will wonder why they should be reading about oil and other commodities? The answer is that their prices influence the price of the Comdolls we are hoping to trade. Currency trading requires having knowledge of the goings on in central bank monetary policies  as well as fiscal and economic policy.

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Louis Holding-Parsons

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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Louis Holding-Parsons

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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