Predicting where the direction of movement of the market is the key to be able to get profit in forex trading, but it is not an easy thing. Professional forex traders understand that the forex trading world has a broad scope is not limited to the world of forex.
In fact, the movement of currencies is affected by many factors: supply and demand, politics, interest rates, economic growth, and so on. More specifically, the growth ekonomomi and exports of a country is closely connected with the country’s domestic industry, then its currency to a particular country has a high correlation with commodity prices.
Three major currencies that have strong relationships with commodity prices is the Australian dollar, Canadian dollar and New Zealand dollar. Other currencies are affected by commodity prices but have a weaker correlation are the Swiss franc and Japanese yen. By knowing the currency which has a close correlation with the price movement of a particular commodity can help traders predict market movements. In this discussion we will see the correlation between oil prices and the currency that you can use the following information in forex trading.
Oil and the Canadian Dollar
In recent years, commodity prices fluctuate quite large. Oil is at $ 60 per barrel in 2006 and jumped to $ 147.27 per barrel in 2008 before falling to $ 40 per barrel in the first quarter of 2009 and then increased to more than $ 80 in 2011.
With the many countries in the world are experiencing a recession, trends in commodity prices may be a factor that distinguishes between further deterioration or improvement in the economy faster.
Oil is a major requirement in the world, at least for the moment, many people in the developed world is in dire need of this commodity. In February 2009, the price of oil is 70% below the highest number of $ 147.12 in July 2008.
The decline in oil prices negatively impacted the oil producers, while consumers benefit in purchasing power. The opposite occurred in early 2008 when oil prices reached record highs, oil producers got many advantages while declining consumer purchasing power.
There are several reasons that may explain the decline in oil prices, which are the increase in the value of the dollar (oil is still much that is valued in dollars) and weaker demand. As the oil-exporting countries, Canada was devastated by the decline in demand, while Japan as a major oil importer benefit.
Between 2006 – 2009, the correlation between the Canadian dollar and oil prices of approximately 80%. In everyday correlations are not too visible, but in the long-term correlation is quite strong stretcher, thus the value of the Canadian dollar is quite influenced by the price of oil.
Canada is the 7th country’s largest producer of crude oil, and continue to climb. In 2000, Canada surpassed Saudi Arabia as an oil supplier to the United States. That is not too much common knowledge, Canada is a country that has the 2nd largest oil reserves, under Saudi Arabia. Location closer and uncertain political conditions in the Middle East and South America make Canada a country of interest for the supply of oil to the United States. Canada does not only serve the demand of oil for the United States, but also from China and other countries.
Diagram 1 shows the positive correlation between oil and the Canadian dollar. It is not surprising that many investors using oil prices as a leading indicator for the price movement of CAD / USD. Keep in mind that based on historical data are negative correlation, when the price of oil increases, the movement of the USD / CAD down, and when oil prices are declining, the movement of the USD / CAD will go up.
Diagram 1: The correlation of oil prices and the movement of the CAD / USD from January 2005 until March 2009.
Some Forex brokers allow you to trade oil, gold, and other commodities, so you can use the diagram provided in the trading platform. You can monitor the price of oil on the Bloomberg website.
Oil and Japan’s economy
On the other side of Japan which imports almost all its oil needs (compare with the United States imported approximately 50%). Until 2011, Japan is the third largest oil importer under the United States and China. Japan’s lack of natural resources, thus requiring the import of crude oil, natural gas, and other energy sources, making the country highly affected by changes in oil prices. Japan also lacks the ability to switch to nuclear power source because it requires a lot of imported uranium as a resource for nuclear reactors. By 2008, the country’s dependence on imported energy sources exceeds 84%. Oil covers 49% of its energy needs, 20% coal, 13% nuclear, 14% natural gas, hydroelectric power 3%, renewable resources 1%. Thus, when oil prices soared, the Japanese economy will have trouble.
The influence of oil prices on the CAD / JPY
From the point of view of exports and imports of oil, the currency pair is deeply influenced by the movement of oil prices is the Canadian dollar against the Japanese yen (CAD / JPY).
Diagram 2 illustrates the close correlation between oil prices and CAD / JPY. Often, the oil price is the leading indicator (as with USD / CAD) for the movement of CAD / JPY. With oil prices continued to decline during this period, CAD / JPY broke through the level of 100 to 76.
Diagram 2: The correlation between oil prices and the movement of the CAD / JPY from January 2005 until March 2009.
The best way to use commodity in forex trading is to pay attention to oil price movements and observe how quickly the forex market will react, although in general there will be a slight lag (time difference) in the forex market response to commodity price movements. Not hurt you follow the development of the oil commodity prices when you are trading currency of the country is strongly influenced by oil import-export activities.