The Effect of Oil Prices on Foreign Exchange Rates

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There are, directly and indirectly, correlations between most trading markets. Forex, essentially being a measure of the value of one currency compared to another, is especially volatile when it comes to the performance of global economies, stock indexes, and commodity prices. The recent drop in oil prices has seen significant changes in the Forex market, and the savvy investor needs to know how oil prices and exchange rates affect one another before implementing trades on ETX Capital and other Forex platforms.

The foreign exchange market is affected by many economic and political factors. Interest rates, manufacturing output, import and export rates, and GDP are among some of the factors that affect every country, but there are some factors that are very specific to certain economies. For example, because Australia is the world’s leading gold producer, poor gold performance typically correlates to a weak Australian dollar.

Similarly, the performance of some countries’ currencies are directly linked to the performance of oil. Canada is a net oil exporter, so they export considerably more oil than they import, and their economy fares better when oil is in high demand and crude prices are high. At the other end of the market is Japan. They export nearly all of their oil, so when prices are low it means that the Japanese Yen will benefit.

There are many currency pairs that can be traded on the Forex market, but for those investors that are looking to trade according to oil prices, the Canadian Dollar to Japanese Yen pair is a particularly volatile and even predictable one. When oil prices are high, it has a positive effect on the CAD and a conversely negative effect on the JPY, which means that a considerable move can be expected if oil prices rise significantly.

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The plummeting crude oil price that has been witnessed recently has greatly affected some of the world’s economies. Saudi Arabia, which is the largest member of OPEC and the world’s largest producer of oil, has experienced a significant economic downturn as a result of the price drop. As well as resulting in a poor performance for the riyal, this has also seen the Saudi government opting to clear out a large portion of its foreign currency reserves. This, in turn, saw downward pressure applied on the US Dollar.

There are many factors that directly affect the world’s economies and currencies, and the significance of oil to most countries means that it is one commodity that will naturally affect the performance of many currencies.

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Mark Holland

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