understanding carry trade and commodity currencies

What are carry trade currencies ? Sometimes there are big interest rate differentials in a pair. The currency with the bigger interest is called carry trade currency. Commodity currency is a currency like the Australian Dollar, New Zealand Dollar and the Canadian. The Canadian economy is tied to the price of oil, which causes the price of this commodity to become a major driver in the value of the Canadian dollar. Other countries such as Australia or New Zealand are in a similar position. All of these countries see money flowing in when their respective commodities rise, causing their currencies to appreciate. The rise in oil prices has brought a great big smile to the faces of oil producers - and a nice fat boost to their pocketbooks. As a net oil producer, Canada has benefited the most from the rally in oil, while Japan - a major net oil importer - has suffered the most. Gold traders may also be surprised to hear that trading the Australian dollar is just like trading gold. As the world's third largest producer of gold, the Australian dollar has an 85% positive correlation with the precious metal. Generally speaking, this means that when gold prices rise, the Australian dollar appreciates as well. The proximity of New Zealand to Australia makes Australia a preferred destination for exporting New Zealand goods. Therefore, the health of New Zealand's economy is closely tied to the health of the Australian economy, which explains why the NZD/USD and the AUD/USD have had a 96% positive correlation over the past three years (2003-2005). Interestingly enough, the NZD/USD actually has an even stronger correlation with gold than the AUD/USD does - the correlation has been 90% over the past three years. More about this topic can be learned with our forex manual which is in e-book format and is sent after purchase through Paypal.