Effects of A Lower Oil Price On The FX Market

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Currencies are moved by economic factors such as supply and demand, geopolitical events, economic growth, or interest rates and therefore it is important for forex traders to understand the impact of some economic factors on currencies. A country’s economic growth and exports are linked to its domestic industry, and therefore some currencies are more influenced than others by the price of commodities.

The strong decline in oil prices in 2014 had a strong impact on some countries’ economies and is likely to affect some commodity currencies in the future. The three currencies that have the strongest correlation with commodities are the Australian dollar, the Canadian dollar and the New Zealand dollar. This article looks at how the forex market has adjusted to the new oil prices and which trading opportunities could emerge in 2015 for some specific commodity currencies.

The biggest oil price drop in 30 years

The fall in oil prices can occur for various reasons, including a stronger dollar – which is the currency in which oil is priced - and a weaker global oil demand.

The OPEC meeting held at the end of November 2014 gave the market a shock. OPEC countries decided to maintain production despite a consensus outlook of a possible decrease, as the price of oil challenged its historical lows. Right after the decision to maintain production rates, the ICE Brent and the WTI Oil dipped to more than 10% in a single day. As of 12th December 2014 (Friday), we saw the 2nd largest yearly decline of crude oil over the past 30 years.