An FX & Commodity Spread Strategy involves trading currencies alongside or in opposition to commodity price movements to exploit macroeconomic correlations, export-driven flows, and relative value opportunities. This approach is built on the strong fundamental ties between specific currencies and the commodities their economies are most exposed to — such as oil, gold, copper, or agricultural products.

This article explores how to build an effective FX & Commodity Spread Strategy, key relationships to monitor, and how professional traders use spreads to generate low-risk macro alpha.

Why Combine FX and Commodity Spreads?

• Commodity-exporting countries experience currency strength when their key exports rise.
• Commodity-importing countries suffer currency pressure when commodity prices rise.
• Spreads between related commodities can forecast shifts in trade balances and FX flows.
• FX traders can hedge directional risk by trading currencies relative to commodities instead of outright pairs.

This strategy enhances precision and macro awareness by aligning FX positions with underlying commodity economics.

Key Currency–Commodity Relationships

Currency	Key Commodity Exposure
AUD	Iron ore, gold, copper
CAD	Crude oil, natural gas
NOK	Crude oil, natural gas
NZD	Dairy, soft commodities
ZAR	Gold, platinum, palladium
BRL	Soybeans, oil, iron ore

These correlations form the foundation of spread strategies where traders express views on commodities through FX, or vice versa.

Core FX & Commodity Spread Strategies

1. FX–Commodity Correlation Trade

Trade a currency and its related commodity based on divergence or convergence signals.

Example:

• Oil rises 10%, but CAD remains flat.
• Setup: Long CAD, short USD or other weak currency → expect CAD to catch up.

Conversely:

• If AUD rallies but copper falls sharply, short AUD/USD expecting reversal.

This strategy is based on mean reversion in historically strong correlations.

2. Relative Commodity Spread Drives FX Pair

Use a commodity spread (e.g., oil vs gold) to drive relative value in FX.

Example:

• Oil outperforms gold (WTI up, gold flat) → bullish for CAD vs AUD.
• Trade: Long CAD/AUD — Canada benefits from oil strength; Australia lacks support from gold.

Another:

• Copper falling vs rising wheat prices → bearish AUD/NZD as Australia is copper-linked and NZD benefits from food commodities.

3. Commodity Price Divergence as a Leading Signal

Use commodity price divergences to predict macro FX flows.

Example:

• Gold and oil prices surge together → global inflation fears.
• Expect defensive FX flows: buy USD/JPY or short EUR/CHF as markets price central bank responses.

Commodities often move before currencies, offering valuable lead indicators.

4. Cross-Hedging Currency Exposure with Commodities

Use commodity exposure to hedge FX positions or vice versa.

Example:

• Long AUD/USD, but want to hedge exposure to Chinese demand.
• Short copper futures to hedge against industrial metal weakness spilling into AUD.

This allows for indirect hedging when direct currency exposure is too volatile or illiquid.

Example Trade Using FX & Commodity Spread Strategy

Scenario:

• Crude oil spikes from $70 to $85.
• CAD fails to rally; remains flat on dovish BoC outlook.
• Meanwhile, gold rallies strongly.

Trade ideas:

• Long gold/WTI spread as gold outperforms oil.
• Short CAD/AUD or short USD/CAD, expecting CAD to catch up.
• Short EUR/CAD, aligning oil-export strength vs EU energy import vulnerability.

These trades align FX positioning with relative commodity performance and monetary divergence.

Tools for Implementation

• Commodity spread charts (e.g., copper vs iron ore, WTI vs Brent)
• CFTC COT data for positioning in commodities and currencies
• Bloomberg correlation monitor for FX-commodity pairings
• Macro calendars for OPEC, DOE inventories, RBA/BoC meetings
• Relative performance trackers (e.g., rolling 30-day FX vs commodity change)

Risk Management in FX & Commodity Spread Strategies

Risk	Mitigation
Correlation breakdown	Monitor correlation coefficients; use spreads with historically tight relationships
Geopolitical disruptions	Adjust quickly to OPEC shocks, trade wars, or sanctions
Central bank surprises	Monitor BoC, RBA, Norges Bank for unexpected dovish/hawkish turns
Illiquidity in commodity markets	Use most liquid futures (WTI, gold, copper) or ETFs to express commodity side

Advantages of FX & Commodity Spread Strategy

• Macro alignment: Trades reflect real-world economic linkages.
• Diversification: Spread trades reduce exposure to outright directional risk.
• Lead-lag opportunities: Commodities often move first, helping anticipate FX trends.
• Cross-hedging flexibility: Traders can neutralise risk using related assets.

Conclusion

The FX & Commodity Spread Strategy offers a powerful and nuanced way to trade global macro themes by aligning currency exposure with real-world commodity flows. Whether exploiting divergences, hedging macro risks, or capturing inflation-sensitive rotations, this approach gives traders a multi-dimensional edge in navigating today’s volatile markets.

To master commodity-linked FX strategies, cross-hedging techniques, and build macro-relative value portfolios, enrol in our advanced Trading Courses designed for institutional FX traders, commodity analysts, and global macro specialists.