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Forex
Trading and the Oil Markets
Why should you worry about the price of oil
if you’re not buying and selling oil?
If you’re trading currencies, there’s one very good reason.
Many of the most important currency trading 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 predict that that won’t be changing any time soon.
The connection between the price of oil and the economy of
many countries is based on a couple of simple facts:
- Countries
with healthy supplies of crude oil benefit economy-wise
from higher oil prices.
- Countries
who depend on imports for their energy needs benefit from
lower oil prices and lose when oil prices rise.
- When
the economy of a country is strong, its currency is also
strong in the forex market.
- When
the economy in a country takes a downturn, its currency loses
value in the currency exchange rate.
The fluctuating oil prices of the past year – 2005 – are a
good example of what can happen when factors affect the price
and supply of oil. Remember from basic economy courses that
higher oil prices act to put the brakes on consumer spending.
This will be true as long as the major source of oil for industrialized
countries is petroleum based. The price of all goods produced
hinges on the price of a barrel of oil. If the 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 fuel their automobiles and heat their homes. The
net result is a downward swing in the economy of the country
until it hits a rallying point that starts it back on an upward
trend.
Experts who watch the oil market are split on which way oil
prices are headed, and just how far. A little over a year ago,
most pundits agreed that $40 a barrel was the upper limit for
a barrel of crude oil. At the year’s beginning, oil had already
broken that point, and was selling at $42.50 a barrel. The
vagaries of the weather, world politics and actual capacity
to meet demands have fueled one of the most volatile pricing
years in recent memory. At one point, the price of crude broke
$70 a barrel, an increase of 65% over the beginning of the
year. And while prices dropped for a short period, at the end
of the year, they were still 45% higher than at the beginning
of the year. Since the turn of the year, prices have begun
their climb again, and the majority of traders believe that
we won’t see a reversal of that trend in the near future. The
conservative predict a price of $80 per barrel. The more aggressive
are calling it at $100.
What will this mean for the currency trading market?
In the currency market, exchange rates are often predicated
on the health of a country’s economy. 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, the following makes sense:
- The
currency of countries that produce and export oil will
rise in value.
- The
currency of countries that import most of their oil and depend
on it for their exports will drop in relative value.
- The
most profitable trades will involve a country that exports
oil vs. a country that depends on oil.
Based on those three points, the experts are keeping their
eye on the CADJPY pairing for the most profitable trades, and
here’s why.
Canada has been climbing on the list of the world’s oil producers
for years, and is currently the ninth largest exporter of oil
worldwide. Since the year 2000, Canada has been the largest
supplier of oil to the U.S., and has been getting considerable
attention from the Chinese market. It’s predicted that by 2010,
China’s import needs for oil will double, and match that of
the U.S. by 2030. Currently, Canada is positioned to be the
largest exporter of oil to China. This puts Canada’s dollar
in an excellent position from a trading perspective.
Japan, on the other hand, imports 99% of its oil. Their reliance
on oil imports makes their economy especially sensitive to
oil price fluctuations. If oil prices continue to rise, the
price of Japanese exports will be forced to rise as well, weakening
their position in the world market. Over the past year, there
has been a close correlation with rises in oil prices and drops
in the value of the yen.
If economy and history are to be heeded, the oil prices can’t
continue to rise indefinitely. Eventually, consumers will bite
the bullet and start cutting their demand for oil and gas.
When that happens, the price of oil will either stabilize,
or start heading back down toward the $40 a gallon that experts
predicted it would never hit. # # # # # SolveYourProblem.com : 2007
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