Let’s talk about the black gold.
You may also know it as Oil.
It runs through the veins of global economy and is a major source of energy.
Oil is undoubtedly the world’s most heavily-traded natural resource and the backbone of some of the largest economies. It has always had a massive impact on many aspects of finance, including Forex.
Oil is estimated to be worth just over $4 trillion a year in revenues.
It will therefore come as no surprise that oil has a significant impact on areas beyond the energy market.
One of the most evident correlations between oil and other markets can be found in nations that produce and export oil as a major part of their economy.
These nations are mega dependent on high oil prices, because a potential collapse could erode the value of their national currency.
And nobody wants that.
For example, let’s take Saudi Arabia. If their oil exports were to collapse for whatever reason, the Saudi riyal’s value would drastically decrease as the country is super dependent on its revenue from oil.
However, it is not only Saudi Arabia that is dependent on the oil industry. We have attached a list of the largest oil producers worldwide below.
FUN FACT: A barrel of oil is priced in USD around the world. When USD is strong, it costs less to buy one barrel of USD. When USD is weak, the price of oil is higher in dollars.
Many financial experts worldwide believe that U.S. dollar is becoming a petrocurrency.
A name given to currencies of nations such as Russia, Canada, or Norway that export SOOOOOO much oil, that the profits from it make up a huge part of their overall economy.
Now, I dare to say that it is clear to see how the price of oil is related to the price of the US dollar.
But… what about currency pairs?
Well, there is a correlation too!
Let’s take a closer look at the USD/CAD currency pair which Forex experts believe is strongly correlated with oil.
Did you know that Canada exports more than 3 billion barrels of oil to the U.S. every day?
This makes Canada the largest supplier of oil to the United States, and well, U.S. the largest oil dealer out there.
Now, due to the volumes involved, this creates a massive amount of demand for the Canadian $$$ (CAD).
Because of this, USD/CAD is super vulnerable to how consumers in the United States react to changes in oil prices.
Let’s talk examples.
If demand of the United States increases, manufacturers will need to order more oil to keep up with the increasing demand. This can then lead to a potential rise in oil prices, which may lead to a fall in USD/CAD.
If demand of the United States decreases, manufacturers may decide slow down with the oil orders which may effectively hurt demand for the CAD.
You can clearly see that oil has had a negative correlation with USD/CAD.
This has been the case since 2000 and it was especially visible from 2000 to 2016 when it was 93% negative.
In practice, this then means that when the value of oil increases, USD/CAD falls.
And when the value of oil goes falls, USD/CAD increases.
Take a look a the chart below to see what it looks like on a chart side by side.
So, the next time you’re topping up your car and you see the oil prices rising, it may be the right time to go short on USD/CAD…
Even if you don’t want to place a trade, have a look at that USD/CAD chart to see if the negative correlation is still there!
There is no denying that oil is one of the most important commodities worldwide and it will undoubtedly continue to shape economic trends for decades to come.
Watch its space!
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