Oil Prices And Currency Markets
Crude oil rices skyrocketed from around $60-70 per barrel to amost $150 per barrel in a matter of just few monts in the summer of 2008. No one is sure whether the increase in the prices was due to speculation by the hedge funds. When the stock markets crashed in the middle of 2008, most of the hedge funds had to liquidate their investments in crude oil futures to cover the redemption pressure on them. Prices collapsed and are down now due to low consumer demand because of the global recession. But it is being predicted by the experts that with a recovery in the global economy, the oil demand will rise and the prices will go up again. Oil demand in China and India plays a major role now.
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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 companies making these products make. Declining profits means declining stock prices.
Let’s take a look at it more closely to understand the two effects that pull USD with oil. When oil prices increase, the demand for US Dollar also increases. Most of the countries need US Dollar to pay for their oil imports. High 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? The effect varies for different currency pairs. Suppose you are watching a currency pair that involves the USD and a currency representing a country that does well during the times of high prices of crude oil.
So what we can say is that some currencies have positive correlation with oil prices and other currencies have negative correlation. The currency pair CAD/JPY shows the strongest reaction to rising oil prices. Japan imports almost 100% oil.