For most traders, the idea of trading some pairs makes for a nervous time. However, I have learned that ignoring some of the more exotic currencies can add quite a bit of profit to your account, if you know what you are looking at.
The reason I like the commodity currencies is that they have some of the strongest correlations to specific markets. While there are some that are a bit more opaque, such as the New Zealand dollar and some softs – there isn’t a clear-cut correlation all the time – there are others that trade almost solely on another market. Some of these currencies aren’t widely traded, and the spread looks astronomical as well. However, if you understand that the pip value is much lower, and that a 400 pip move in something like the Mexican peso isn’t a big deal, you can start to take advantage of longer-term moves.
The Norwegian krone is one of my favorites. The reason that the currency is so interesting to me is that it is so highly correlated to the natural gas markets. This is because there is so much drilling done in the North Sea. (Sometimes traders will also use the NOK as a proxy for crude oil as well.) What is even more impressive is that this little country is a massive exporter of natural gas to the EUR. Because of this, the natural gas markets have a major influence on where the NOK goes. On the attached monthly chart, I have the line chart of natural gas spot prices, with a candle chart of the USD/NOK pair. You can see that the pair has negative correlation with the natural gas prices, meaning that as the natural gas markets rally, the USD/NOK falls – showing Krone strength. Obviously, it works in both directions as well. Oil is also another reason that can move this pair, but this correlation is breaking down a bit as the Americans are becoming major oil exporters as well.
Yes…I know that the spread is high in the Peso, but in the end the pip value is microscopic. Because of this, it is just a viable as trading the Canadian dollar or maybe the British pound. I like this pair because the Peso is highly levered to crude oil, especially the WTI market. The currency is also a bit of a proxy for Latin America, meaning that if the overall health of Latin America is picking up, a lot of traders will use the Peso as a way of taking advantage of minor economies like Nicaragua, Chile, Panama, etc.
Below, you will see a monthly candlestick chart for the USD/MXN pair. You can see that the Mexican peso tends to strengthen when the value of oil rises, and vice versa. I believe that this correlation is directly related to all those Mexican oil rigs in the Gulf of Mexico.
If you can follow commodity markets, you can use this knowledge to supercharge your Forex returns. While there are numerous markets that you can so this in, one of my favorite ones is the NOK/JPY pair. This is because the Norwegian krone is a proxy for oil markets. (see above) Japan imports 100% of its petroleum. In this scenario, it is a “perfect storm” for currency trading. Check out how capital flows from Japan to Norway when oil is in demand on this monthly chart below:
Because of the possibilities, it can be an immense help if you have a broker that offers a large amount of currencies to trade. Most run of the mill brokers will only carry about 22 pairs, but if you can find one that has more exotic pairs, you can place long-term trades based upon well-known fundamentals like the demand for crude oil or other such commodities.