A commodity currency is a currency that co-moves with the world prices of primary commodity products, due to these countries' heavy dependency on the export of certain raw materials for income. Commodity currencies are most prevalent in developing countries (eg. Burundi, Tanzania, Papua New Guinea). In the foreign exchange market, commodity currencies generally refer to the New Zealand dollar, Norwegian krone, South African rand, Brazilian real, Russian ruble and the Chilean peso. Commodity currencies' nature can allow foreign exchange traders to more accurately gauge a currency's value, and predict movements within markets based on the perceived value of the correlated commodity.
Effects
Because commodity currencies are tied so closely to specific goods, this connection can be a double-edged sword for a country's economy. While any nation usually experiences deflation when exports fall and inflation when they rise, these swings are much more severe for commodity-dependent countries because the value of their exports relies heavily on just a few specific products.
Positive
According to a 2009 study on commodity currency titled "Can Exchange Rates Forecast Commodity Prices?" by Yu-Chin Chen, Kenneth Rogoff and Barbara Rossi, exchange rates of commodity currencies can predict future global commodity prices. This is hugely beneficial for economists and policymakers who want a reliable measure of future commodity prices.