The greatest disparities in international trade and commodities trade were attributed to the major differences between the items trade on both markets. Both forex rates and commodities can be traded via a futures exchange as pre-defined contracts, but the forex market can not trade commodity contracts. The market for commodities trades in products such as coffee, cocoa, and mined goods such as gold and oil. Foreign exchange, also called forex or FX, is a worldwide market which trades in currencies such as euros, yen, and dollars.
Many of the two markets’ approaches and analysis mirror one another. With the following variables, which market you would want has a great deal to do with your comfort level.
The commodity markets are highly controlled, whereas the forex is more like the wild west. There is some forex regulation, but it’s much looser. There is a reasonable amount of circumvention of what little regulation already exists. And with the government on their side, some traders feel they are better off.
With certain kinds of markets, some individuals feel more comfortable. Some people like goods because it’s a physical market to which they can relate. Because many commodities can be seen in everyday life, because they can connect to things like sugarcane and wheat, some traders prefer commodities.
Forex and Currency Markets Leverage
Although both markets have leverage, the forex market has a substantial amount of leverage, and you don’t have to jump through hoops to have it. All you do is fund a few hundred dollars for your account, and you can control thousands. While leverage in commodity markets is also an option, leverage in forex trading is much more spectacular.
A trader looking for a compromise might trade currencies based on commodities. The Australian dollar, the Canadian dollar and the New Zealand dollar are included in these currencies. The Australian dollar has historically had a positive correlation with the price of Spot Gold (although the strength of the correlation varies over time). The dairy-dependent New Zealand economy has a comparable positive correlation with the price of whole milk powder. Finally, there is a positive correlation between the Canadian dollar and the price of crude oil. Therefore, the Canadian dollar has similarly witnessed big movements with the powerful developments in oil in 2014 and 2016.
Another subset of the foreign exchange market is that of the currencies of emerging markets. Developing market currencies also reflect the growth of commodities and tend to have an inverse US dollar correlation. Commodity currencies also pay greater yields than market currencies that have been developed. Therefore, emerging market currencies in the right market can be a good addition to the volatility shown in commodity trading.
Limits on Exchange
Whereas foreign exchanges are over-the-counter and traded through brokers or in the interbank market, commodities trade on an exchange. Commodities have daily range limits through trading on an exchange. The markets are said to be limited up or down when these limits are exceeded, and no transactions can be placed. When you are a merchandise distributor on the wrong foot, you simply see your account vanish without the power to respond.
Although rapid losses in the FX market can also occur, there are very few instances where you are absolutely unable to exit your trade, which can occur with exchange limits and commodity markets.