The Effect of Natural Resource Exports on Currency Movement

A large number of countries’ economies are dependent on the natural resources sector. Thus, whether an oil, mineral, agricultural or other raw material export hits the press, its influence on a nation’s currency movement can be quite powerful. Knowing this relationship is important for you to make Forex trading decisions. So, let’s take a look at how natural resource and currency movements are related.

In countries rich with natural resources, there is an economic benefit of exporting those resources. For example, oil exporting countries like Russia, Saudi Arabia and Norway have currency to which the world demand for crude oil is closely linked. Usually when oil prices go up, their currency appreciates. On the flip side, the currency tends to weaken when the prices decrease. It is this relationship between natural resource exports and currency value that is so important within the context of Forex trading, where currencies go up and down on a near daily basis.

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Furthermore, the effect is not isolated to one resource. Consider mining exporting countries, for example Australia and South Africa. The currencies they use, the Australian Dollar (AUD) and South African Rand (ZAR), have similar reactions to the price of commodities such as gold, platinum and coal. And this is why understanding this dynamic is so important for Forex traders. Increases in demand for these resources lead to an increase of the currency’s value, and to the contrary, decrease in demand leads to the fall of the currency. Forex trading strategies must always take the influence of global market forces over these resource prices.

Apart from the direct relationship with commodity price, natural resource exports affect currency movement by another agent known as macroeconomic factors. The prices of resource exports in countries dependent on them lead to an increased foreign investment. Foreign investors purchasing local assets, bonds, and stocks tend to require the local currency for the transaction, and, as such, this influx of capital fortifies the currency. For forex traders, these inflows and outflows should be watched very closely as they can create sudden extreme value changes for currencies.

Moreover, trade imbalances can be caused due to fluctuations in natural resource exports. A country has its currency strengthened when it exports more natural resources than it imports. Its currency demand is growing as other peoples trade for its resources. On the other hand, if exports are less than imports, mostly for a resource based economy, the currency may depreciate. Forex traders have to be on constant alert and track trade balances to be able to predict which way currency values will budge.

This relationship has important implications for Forex trading as natural resources markets and global financials are almost always connected. Understanding how different resources move the currency movement helps traders to develop more nuanced strategies and risk management to better achieve the trading goal. Successful Forex trading can mean tracking commodity price trends, what kind of geopolitical events are happening to resource rich countries, or what current global demand for resources is.