Well, if you’re trading currencies, you better pay attention to what’s going on with oil!
Many currency pairs rise and fall on the price of a barrel of oil. The price of oil has been a leading indicator of the world economy for decades, and experts say that this won’t be changing any time soon.
The connection between the price of oil and the economy of many countries is based on a few simple facts:
- The economies of countries supplying crude oil to the world benefit from higher oil prices.
- Countries depending on oil imports for their energy needs benefit from lower oil prices and lose when prices rise.
- When the economy of a country is strong, its currency also tends to be strong in the forex market.
- When the economy of a country takes a downturn, its currency loses value in the currency exchange market.
For oil dependent countries, higher oil prices act to put the brakes on consumer spending, since the price of many consumer goods hinges on the price of oil.
If oil prices rise, so do production and supply prices for most consumer goods. In addition, the expenses of individual consumers rise as they pay more to gas up their cars and keep their homes warm.
The net result most likely will be a downward swing in the economy.
And just for the record, even though the price of oil tends to have a major impact on the economies of oil dependent countries, there are many additional factors playing into the equation.
If the economy is robust and growing, the exchange rates for their currency reflect that in higher value.
If the economy is faltering, the exchange rate for their currency against most other currencies also stumbles.
Knowing that, keep the following in mind:
The currency of countries that produce and export oil tends to be stronger when oil prices rise.
Canada has been climbing on the list of the world’s oil producers and has been one of the largest suppliers of oil to the U.S. for the past years. And as long as the world continues to depend on oil, the Canadian dollar will benefit from it.
The currency of countries that import most of their oil and depend on it for their exports tend to drop in relative value with rising prices.
An example here is Japan, who imports the vast majority of all oil. Japanese reliance on oil imports makes their economy especially sensitive to oil price fluctuations.