How to Use the Forex Market to Profit from Your Outlook on Commodities
If you wanted to construct a position in the financial markets that mirrors your economic outlook, what market would you choose?
If you’re like most people, you would pick the stock market. You’d probably build your proxy by buying – or shorting – the stocks of individual companies you feel will either excel or decline in the current economic conditions. Or, maybe you’d do the same with some exchange traded funds (ETFs), or by purchasing select mutual funds.
While that’s fine, the Forex market allows you to do the same thing with greater liquidity and buying power, which permits you to take larger positions, exit them more easily, and achieve better results – as long as your views are accurate.
For instance, let’s say you’re bullish on commodities. One possible way to play this outlook would be to buy the currencies of countries that produce a lot of commodities, such as Australia, Canada, and New Zealand. So, you’d accomplish this by purchasing the Australian dollar (AUD), Canadian dollar (CAD), and the New Zealand dollar (NZD).
If your bullish thesis is correct, the macro conditions should cause all three currencies to rise, providing you with a simple way to profit from your outlook.
Or, maybe you feel the rally in oil will continue. Instead of buying the individual stocks of oil industry companies, you could just buy the CAD and short the Japanese yen (JPY). In the Forex market, this would be accomplished by simply going long the pair CAD/JPY.
Why take this action? Because Canada produces an abundant amount of oil, while Japan generates very little, and instead has to export most of their supply. Again, if your premise is right, the CAD will rise while the JPY sinks – due to climbing oil prices – and you’ll profit from the move.
Of course, these are just a couple of examples of how you can exploit the diversity of the Forex market and use your fundamental prowess to make money. And, the more you understand the intricacies of the Forex market, the better you’ll be able to do this.
So, the next time you want to take a market position based on your economic views, consider the Forex market, and not just the stock market.
Mike Norman teaches Forex trading at Cyber Trading University. Mike is an economist, as well as a former floor trader and exchange board member, who has successfully traded the Forex market for over 30 years, and who regularly appears on the Fox News Channel.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.