Wall Street watches oil prices like a hawk. Remember the early part of 2008 when oil prices skyrocketed from near $70 to almost $150 within a few months. This was more than a 100% increase in oil prices. Many hedge funds heavily betted on the increase in oil prices and made a windfall.
Most of the increase in the oil prices was due to speculation. When the stock markets crashed, most of the hedge funds had to liquidate their investments in oil futures. The prices came down. The prices are down due to low consumer demand in a recession. But it is being predicted that with a recovery in the economy, the oil prices will go up again.
As oil prices go up, consumers have to spend more on oil. The more they spend on oil, the less they spend on other products. The less they spend on other products, the less profit other companies make. Declining profits means declining stock prices.
The opposite is also true. The less the oil prices become, the more Wall Street becomes optimistic about the profit potential of companies. This increased optimism leads to increase in stock prices. Two large futures exchanges are used to determine the prices of oil. They are the New York Mercantile Exchange (NYME) and the International Petroleum Exchange (IPE).
Historically the rising oil prices have been associated with falling markets. NYME is the home of the crude oil futures. By monitoring the movement of the crude oil futures, you can get a feel of the future economic situation of the United States. Since oil is heavily traded in USD, this affects the USD. The effect is however a bit complicated.
Lets take a look at it more closely. When oil prices increase, the demand for US Dollar also increases as most of the countries need US Dollar to pay for their oil imports. Increased demand for US Dollar means that it should appreciate.
But this is not the whole picture. We have to take another aspect into account. Increased oil prices also hurt the US economy. Now, which effect is more important for the currency markets?
Net effect varies for different currency pairs. Take a currency pair that involves the USD and a currency representing a country that does well during the times of high oil prices. Canada that has huge oil reserves after Saudi Arabia. US imports more oil from Canada than any other country. High oil prices help the Canadian economy. Net effect would be depreciation in the value of USD/CAD pair. Suppose you take a currency pair that involves USD and a currency whose economy is negatively affected by the rising oil prices. The demand for USD will rise.
So what we can say is that some currencies have positive correlation with oil prices and other currencies have negative correlation with rising oil prices. The currency pair CAD/JPY shows the strongest reaction to rising oil prices. Japan imports almost 100% oil.
So when oil prices rise again, watch for a currency pair that has the strongest correlation with oil prices like CAD/JPY. CAD is positively correlated with oil prices and JPY is negatively correlated. So CAD/JPY can be a very good currency pair to trade during times of rising oil prices. - 23210
Most of the increase in the oil prices was due to speculation. When the stock markets crashed, most of the hedge funds had to liquidate their investments in oil futures. The prices came down. The prices are down due to low consumer demand in a recession. But it is being predicted that with a recovery in the economy, the oil prices will go up again.
As oil prices go up, consumers have to spend more on oil. The more they spend on oil, the less they spend on other products. The less they spend on other products, the less profit other companies make. Declining profits means declining stock prices.
The opposite is also true. The less the oil prices become, the more Wall Street becomes optimistic about the profit potential of companies. This increased optimism leads to increase in stock prices. Two large futures exchanges are used to determine the prices of oil. They are the New York Mercantile Exchange (NYME) and the International Petroleum Exchange (IPE).
Historically the rising oil prices have been associated with falling markets. NYME is the home of the crude oil futures. By monitoring the movement of the crude oil futures, you can get a feel of the future economic situation of the United States. Since oil is heavily traded in USD, this affects the USD. The effect is however a bit complicated.
Lets take a look at it more closely. When oil prices increase, the demand for US Dollar also increases as most of the countries need US Dollar to pay for their oil imports. Increased demand for US Dollar means that it should appreciate.
But this is not the whole picture. We have to take another aspect into account. Increased oil prices also hurt the US economy. Now, which effect is more important for the currency markets?
Net effect varies for different currency pairs. Take a currency pair that involves the USD and a currency representing a country that does well during the times of high oil prices. Canada that has huge oil reserves after Saudi Arabia. US imports more oil from Canada than any other country. High oil prices help the Canadian economy. Net effect would be depreciation in the value of USD/CAD pair. Suppose you take a currency pair that involves USD and a currency whose economy is negatively affected by the rising oil prices. The demand for USD will rise.
So what we can say is that some currencies have positive correlation with oil prices and other currencies have negative correlation with rising oil prices. The currency pair CAD/JPY shows the strongest reaction to rising oil prices. Japan imports almost 100% oil.
So when oil prices rise again, watch for a currency pair that has the strongest correlation with oil prices like CAD/JPY. CAD is positively correlated with oil prices and JPY is negatively correlated. So CAD/JPY can be a very good currency pair to trade during times of rising oil prices. - 23210
About the Author:
Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading and swing trading stocks and currencies. Learn Forex Nitty Gritty. Discover Forex Magic Machine. Try Netpicks Forex Signal Service.
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