How Crude Oil Affects Currencies

Crude oil prices have been capturing many news headlines around the world today. Unless you’ve been living under a rock, you’re pretty much aware of the rapid fluctuations of oil prices.

If you’re a beginning Forex trader, you’re probably thinking “So what? How does the oil prices relate to currency trading?” Well, there are several ways. Most important currencies we have rise and fall depending on the price of a barrel of oil. The oil prices have been a leading indicator of the world economy for decades and experts foresee that this won’t be changing any time soon. The connection between the price and oil and the economy of different nations is based on some simple facts which are outlined below:

–          Countries that depend on imports for their energy needs benefit from low oil prices and lose from rising oil prices.

–          When the economy and politics of a country remains stable, its currency is also perceived as strong or competitive in the Forex  market.

–          Countries that have a flourishing supply of oil benefit from higher oil prices, economy-wise.

–          When a country experiences an economic crisis, its currency becomes devalued in the Forex market.

Based on these facts, oil trading experts pay attention on certain currency pairs for the most profitable trades. For example, some traders focus on the CAD/JPY pair, and here’s why. Canada is one of the most thriving nations today and has quickly grown to become the ninth largest oil exporter worldwide. Since the year 2000, this country has been the largest supplier of oil to the U.S. and has also been getting a great attention from the Chinese market.

On the other hand, Japan, another thriving country imports about 99% of its oil. And since their economy’s well being is heavily reliant on oil, they are especially sensitive to oil price fluctuations. Even just minor movements in the oil market can cause big concerns for Japan. Additionally, if the prices of oil continue to climb, the price of Japanese exports will be forced to scale up as well.  This could weaken their competitiveness in the world market as a result. That’s why if you ask any trader who focuses on the yen currency, you’ll find out that oil prices are closely related to its value.

The future of crude oil is uncertain as of now and there are many different directions and outcomes we can expect to see in the following days, weeks and months. So basing from this argument alone, it’s easy to see that there are a number of factors that come into play in the Forex trading arena.