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Thread: Catching the Future of Oil and It Affects Trading in Forex

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    Default Catching the Future of Oil and It Affects Trading in Forex

    To be a successful trader in the foreign exchange market, it is essential to understand the correlation between currency and oil. This is because most of the important currency pairs rise and fall in relation to the price of a barrel of oil. For decades the price of oil has been a leading indicator of world economy. It is likely that this connection will continue for years to come.

    There are several reasons behind the strong relationship between the global economy and the price of oil. To begin, countries that have an abundance of oil will benefit from higher oil prices. Their economies will flourish and when the economy of a country is strong its currency is gains value in the currency exchange rate.

    Conversely, countries that depend heavily on others to import their oil will only benefit from low prices. Their economies will suffer when the price of oil rises. When the country's economy is suffering its currency is weak in the foreign exchange market.

    In general, the higher the price of a barrel of crude oil the less money consumers will spend, sending the economy on a down turn. This is especially true if the major oil source is petroleum based. This is because if the price of oil raises so do production and supply cost for most goods, leading to higher prices overall. In addition, the consumer has less expendable income to devote to these goods, as they must spend more money on gas for their cars and heat for their homes. The end result is a drop in the counties economy, and a weakening in their currency on the forex.

    Over the past several years, oils prices have been soaring. In 2004 most experts agreed that the price of a barrel of oil would top off at 40 dollars. But that upper limit was shattered by demand requirements, natural disasters, and world politics. By 2005 the price of a barrel of crude oil had peaked at 80 dollars. Experts believe that the trend in oil prices will continue its upward climb in the immediate future.

    This prediction has a huge impact on the foreign exchange market. Since exchange rates are often determined based on the health of a nation's economy, the price of oil will play a primary role in deciding those rates.

    This means if a country that produces and exports oil it will have a more robust economy. Therefore, there currency of that country will be stronger on the forex. The exchange rate for that currency will be higher in value.

    However, countries that have to import their oil will see their economies suffer. While their economy is on a downward swing the exchange rate for their currency will also falter.

    Because of these important factors much attention has recently been paid the Canadian currency. This is because Canada is the leading oil supplier to the United States and is a significant supplier to China as well. China is expected to have its need to import oil double by 2010, putting Canada in position to be its primary source of imported oil. This has the potential to place Canada's dollar in an excellent position in the foreign exchange market.

    It should be noted, however, that oil prices couldn't continue to rise indefinitely. There will be some point where the trend must reverse itself, and the price of a barrel of oil will begin to drop. Consumers will be unable to afford the higher prices and will limit their spending. Once this begins, the simple dynamic of supply and demand will force oil prices to stabilize and eventually drop.
    by forexaxis.com

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    Bullish fxgirl's Avatar
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    yes ,like cad has a corellation with oil .also dollar the higher the oil prices the lower the dollar.........

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    In Profit yahzeex's Avatar
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    the price of all comodities is going down since fed cut rates and i think oil will go back to the 90 level..........

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