How Oil Affects the Forex Market?

What is Forex? Forex is the world's largest financial market, with a daily volume of more than $ 1.5 trillion. Unlike other financial markets, the Forex market is decentralized and lacks a physical location. It operates through an electronic network of banks, corporations and individuals trading one currency for another.

One of the practices that every trader tries to perform and improve, is predicting market movement. Analysts use technical and fundamental to predict the direction of the economy and the stock market analysis.

Why should we worry about the price of oil, if we are not buying or selling? When investing in foreign currency in the Forex, there is good reason. Many of the crosses major currencies rise and fall with the price of a barrel of oil. The price of oil takes to be the leading indicator of the world economy for decades, and experts predict that this will not change soon. The connection between oil prices and the economy of many countries is based on a very simple factors:

- Countries with large oil reserves benefit from the high price of a barrel of oil.

- The countries dependent on oil imports for its energy needs benefit from lower oil prices. In the same way, they are adversely affected when the price rises.

- When a country's economy is strong, the currency of that country benefits in the forex.

- When a country's economy worsens, its currency loses value in the currency market.

The opinions of experts who analyze the oil market are divergent about the direction they are taking oil prices, and about how far this trend will continue. Recently, most experts agreed that a price of $ 40 per barrel was the highest price he could pay for a barrel of crude oil. Soon after, oil had already surpassed that barrier and traded at $ 42.50 a barrel. The vagaries of weather, world politics and actual capacity to cope with the demands have contributed to one of the most volatile years in terms of prices that have memoria.En one point, the price of crude exceeded $ 70, representing a huge increase of 65% from the beginning of the year. And although prices fell for a short period, end of the year were still 45% higher than a year earlier. With the change of year prices have returned to climb, and most traders believe that no witness a reversal of this trend in the short term. The more conservative forecast that the price per barrel will be located in the $ 80, while the boldest estimated to reach $ 100 again.

Fluctuating oil prices last year - 2005 - is a good example of what can happen when factors affect the price and supply of oil. Remember what you learned in basic economics courses, when you said that higher oil prices acted slowing consumer spending. This will remain true as long as the major source of energy in industrialized countries remains oil. The price of all the goods produced depend on the price of a barrel of oil. If the price of oil rises, so do the costs of production and supplies of most consumer goods. In addition, expenses of individual consumers grow as they pay more to fuel their cars and heat their homes. The net result is a downward fluctuation in the economy, until it reaches a point that makes recovery restart upward trend.

What consequences will this have for the Forex market?

In the currency market, exchange rates often are based on the health of the economy of a country. If the economy is robust and is growing exchange rate of its currency reflected through a higher price. If the economy is weak, the exchange rate of its currency relative to most other currencies also stumbles walk to. Once we know this, it makes sense that:

- The value of the currency of the countries that produce and export oil will increase.

- The relative value of the currency of the countries that import most of the oil it consumes and imports of which depend on it will fall.

- The most profitable operations will have to do with a country that exports oil vs. a country that depends on it.

Based on these three points, experts are watching the CADJPY as may hold the most profitable trades, and this is the reason.

Canada has been climbing positions in the list of global oil producers for years, and is currently the ninth largest exporting oil. Since 2000, Canada has become the largest supplier of oil to the United States, and has been getting considerable attention from the Chinese market. It is predicted that by 2010, the oil import needs of China will be doubled, and that will be equivalent to those of the United States by 2030. Currently, Canada is emerging as the biggest oil to China. This puts Canada in an excellent position from the perspective of trading.

By contrast, Japan imports 99% of its oil. Their dependence on oil imports makes their economy too sensitive to fluctuations in the price of oil. If oil prices continue to rise, the price of Japanese exports will also be forced to increase, weakening its position in the world market. In the past year, there has been a close relationship between increases in oil prices and falls in the value of the yen.

If we take into account the lessons of economics and history, oil prices can not continue to rise indefinitely. Eventually, consumers will bite the bullet and begin to reduce demand for oil and gasoline. When this happens, the oil price will stabilize or begin to fall toward $ 40 a gallon that experts had predicted as impossible.

As you can see, there are many factors that influence considerably on the Forex game. Please leave speculation to the experts, unless operating in the forex market as a hobby.