The Forex market, as you may know, is the largest market in the world, in which take place transactions on purchase and sale of foreign currencies. The daily trading volume of this market can reach one and a half trillion dollars. The difference between Forex and other markets is that it has no physical location and central exchange. Its operation is through a network of banks, corporations and individual traders who are provided by Forex brokers.
Any speculator, who has experience in the Forex market, understands that there should be a balance so that the financial markets could function optimally. We know that Forex market has a certain relationship with other markets.
The international currency market is linked with commodity, stock and metals markets. The reasons for this dependence are in the fact that all the material, which is something that you can buy or sell, is connected with currency. In addition, all currencies are dependent on the material and commodity values.
Forecasting in the Forex market
The forecast in Forex plays a significant role and is based on current and future market trends by using the available data and facts. By forecasting the direction of the economy, the stock market and individual securities, analysts rely on the statistics of technical and fundamental nature.
For example, if a trader deals with currencies, he cannot ignore the oil prices, even though he does not buy or sell it at all. This is due to the fact that many of the most popular currency pairs can fall or grow depending on oil price variation per barrel. In the last decade, the price of "black gold" has acquired the properties of an important indicator of the global economy. According to experts, this situation won’t change very soon. The relationship between the oil price and the economy of a large number of states has the following factors:
- The growth of oil prices provides a significant economic benefit for the states with healthy supplies of crude oil;
- If oil prices fall, the economic benefit is for those countries that are dependent on commodity imports. Because otherwise, with higher oil prices, their economy loses;
- The state currencies on Forex are as strong as the economy of those particular countries.
- In the event of an economic collapse, the currency is losing value at the rate exchange.
Experts in the oil market have no consensus about the direction of oil prices, as well as how much will last the volatility. The economic theory implies that high oil prices hold back the spending of consumer nature. This situation will persist until the oil will remain the main source of hydrocarbons for the economies of industrialized nations. The price of goods is highly dependent on the price of oil barrel. With the growth of the oil price, the price of production and supply of consumer goods also increases. In addition, the spending of individual consumers gets also higher, because they have to pay more for motor fuel and for heating their homes. As a result, there is formed a downward trend in the economy of the state. This continues until the point of conversion of the downward trend in upward.
How this will be reflected in the Forex market?
Within Forex, the currency rates are often determined based on the economic health of particular states. When the economy is stable and it has a positive trend, it will influence the exchange rate of the national currency, which will increase in value. With a weaker economy, the national currency will fall against other currencies. So, considering that the oil prices go up or are stable, the following can be stated:
- The currencies of the countries that produce oil and are involved in its export will go up;
- If a country is dependent on oil imports, its currency will fall against other currencies;
- The most profitable trades will be among the countries that export oil and those that import it.
If you think particularly about the last point, you will surely have in mind the US dollar. It just so happened that the oil and dollar are two interrelated concepts, after all, the USA produces and consumes a huge amount of this raw material. Notice how often in the news show that oil "crushes" the dollar, or "supports" it. When the oil price changes, the American national currency is also changing, and it obviously guides the currencies of other countries linked to US.
It turns out that when the oil price changes, through dollar, there are also changes in Forex trading. This should be taken into account especially when there are no clear oil price directions, and Forex market is waiting for any factors that will be converted by traders.
When it comes to financial instruments such as raw materials, it should be remembered that they are a great way for low risk investment. The stable situation on the oil markets is favorable for both stock and international currency market. Every speculator must understand that the rise in prices of oil is about decline in consumer spending.
Now, let’s take a currency pair apart. Also based on those three points above, you can consider the most oil dependent currencies for your transaction. For example, the experts find the USD/CAD as having great potential for profit in transactions, and here's why:
- Canada in recent years has become one of the largest oil exporters in the world (the seventh place) and it is the largest exporter of oil to the United States.
- The increase in the supply of oil from the Middle East caused a rapid decline in oil prices, shaking thereby the position of Canadian dollar against major currencies.
- Statistical data confirm the growth of the US economy, and a fall in oil prices only increases the competitiveness of American goods and, as a consequence, the growth of the US currency.
The fall in oil prices, in some way, has a natural character, because the infinite price of hydrocarbons cannot continually grow in terms of economics and history. The desire of consumers to reduce oil and gas consumption is also quite natural. Once more consumers will seriously think about this, oil prices will fall rapidly as previously predicted by experts.