In forex, the valuations of currencies are affected by several factors. Some of these factors include interest rates, the rate of economic growth, political decisions, prices of commodities such as oil, and more.
Oil (Gas, Petrol)
Most people keep an eye on the price of oil naturally; noticing the rise and fall of the price of gas (petrol) every time they refuel their car.
Knowledge and awareness of the price of a barrel of oil is important because the prices of commodities have a huge impact on the financial market, with the price of oil probably the one that has the biggest effect. If you are trading in the forex market, then you need to have a close eye on the price of oil too.
This is because a lot of the major currencies in the world rise and fall based on the price of a barrel of oil. For years now, the price of oil has been a major determinant of the performance of several currencies and the trend doesn’t look to change anytime soon.
There are some facts that connect oil prices with prices of currencies.
- A country that produces crude oil will see its economic boom if the oil prices are higher, while an oil importing country would benefit more if the prices are kept low.
- Economic strength in return brings about a stronger currency valuation while a weak economy affects the currency valuation negatively.
There are some currencies that their valuation is directly related to the prices of gas. One of such currency is the Canadian dollar.
The Canadian Dollar
This currency is positively correlated with the price of gas. This implies that as the prices of crude oil go up, then the Canadian dollar also rises against its competing major currencies, and the opposite will happen if the prices of gas drops. Their currency is affected because Canada happens to be a net explorer of the commodity.
When the prices of gas are high, oil exporting countries like Canada tend to have an increased revenue from their oil exports and in the process giving their currency a boost on the foreign exchange market.
The Japanese Yen
Oil importing countries, on the other hand, are affected by the prices of gas too. A good example is the case of Japan. As it stands, Japan is one of the largest importers of oil in the world. The need for the country to import a large amount of gas and other energy resources has made its currency very sensitive to the prices of crude. Thus when the prices of oil go up, it affects the Japanese economy, weakening the Japanese Yen in the process. If the prices go down, the currency will gain strength against oil-producing currencies.
This ultimately means that the pair of CAD/JPY for example is affected by the prices of oil. U.S also happens to be the highest importer of oil from Canada, thus the pair of USD/CAD will ultimately be affected by the prices of oil. The USD is currently performing better than the CAD as the Canadian dollar had been affected by the dip in oil prices since 2015.
Bottom line: Oil prices are often a leading indicator of a currency’s price action and an important fundamental factor that every currency trader should know and understand.