Effects of Oil Price Movement on Forex

May 8, 2018

Oil prices eased slightly on Tue, 08-052018, a day after hitting 3-1/2 year highs, as investors braced for President Donald Trump’s decision on whether to withdraw the United States from the Iran nuclear deal, a move that could disrupt global oil supply.

 

 

US Dollar is currency of international trade, so for all practical purpose all buy and sales on international level is defined in terms of USD. Also, US is the biggest importer of crude oil. So say when crude price go up, it means US will be shelling out more dollars to buy it, which means more dollars are going out of the country and hence the dollar  will weaken.

 

US is also one of the biggest oil producer – so when oil price will go up, its own oil revenue will also go up – this impact might counter the fall in dollar a little but not significantly because it is a net importer.

 

A hidden string ties together currencies and crude oil, with price actions in one venue forcing a sympathetic or opposing reaction in the other. This correlation persists for many reasons, including resource distribution, balance of trade (BOT) and market psychology. And crude’s significant contribution to inflation and deflation intensifies these interrelationships during strongly trending periods, both higher and lower.

 

 

In addition, crude oil is quoted in U.S. dollars (USD) so that each uptick and downtick​ generates immediate realignment between the greenback and numerous forex crosses. These movements are less correlated in nations without significant crude oil reserves, like Japan, and more correlated in nations that have significant reserves, like Canada, Russia, and Brazil.

 

CONCLUSION:

Crude oil shows tight correlation with many currency pairs for three reasons.

  1. The contract is quoted in U.S. dollars so that pricing changes have an immediate impact on related crosses.

  2. High dependence on crude oil exports levers national economies to uptrends and downtrends in the energy markets.

  3. Collapsing crude oil prices have triggered sympathetic declines in industrial commodities, raising the threat of worldwide deflation that undermines economic growth, forcing currency pairs to reprice relationships. 

 

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