Correlations Between Oil And Forex – How To Sell Oil With Forex
By trading correlated currencies, forex traders can reap the benefits of oil price shock around OPEC news releases and other major events. Learn how to trade oil on foreign exchange markets and which exchange rates are connected to oil prices.
FX and the price of oil
When you are unable to trade the oil market directly, trying to trade the price of oil with FX pairs is a common way to take a position on the commodity.
Because some economies rely on exports, correlations between goods and services and forex combinations are common. The connection can be positive or negative, but it’s important to remember that it’s not permanent. The correlations are weak at times and completely absent at others. This is because to the fact that oil prices aren’t the only factor at work. So, while we’ll go over some of the most abundant oil FX pairs, you should still consider the context when trading. Inability to determine whether the connection is weak or strong.
Pairs of crude FX
When oil prices begin to move, currency traders’ thoughts are likely to turn to USD/CAD. The pair has historically been negatively correlated with the price of oil; however, this relationship is highly erratic.
The major cause of the weak relation was the sale of the USD in both trades. Oil is priced in US dollars, so for every barrel of crude oil purchased, USD units are sold. And whenever UDS/CAD is purchased, traders are purchasing a CAD for a specific amount of money. This means that the USD/CAD will fall when oil – and thus the CAD – rises, and vice versa.
Canada is also a significant exporter of oil, the majority of which has traditionally been purchased by the United States. As oil prices went up and down, so did the number of funds flowing from the United States to Canada, influencing currency demand.
And, while the United States still purchases a lot of oil from Canada, the country’s reputation as a net importer of oil is untrue. The success of its borehole and shale gas industry has led US shale production to the point where the US is now the world’s top oil producer.
This means that the USD/CAD correlation isn’t as reliable as it once was because rising oil prices no longer participate in a large trade deficit but can reduce it. Indeed, many expect the connection to shift from a negative to a strong correlation as the United States becomes more of a Petro currency.