It is well known and well documented that the price of the US dollar directly affects the price of gold because gold is traded in dollars. Therefore, if the value of the dollar rises the price of gold naturally decreases and vice versa. However, a less well known trait is crude oil’s effect on currency pairs, as seen by traders and other online Forex brokers.
Crude oil’s effect on currency pairs isn’t direct. Due to the fact the some nations are ‘oil exporting’ nations, while others are ‘oil importing’ nations, a rise or fall in the price of crude oil will directly affect many nations. The economies of oil exporting nations will be boosted by a rise in the price of crude oil, while oil imports will suffer. The reverse effect would take place if the price of crude oil fell. For example, Canada is the ninth largest oil producing nation in the world, whereas Japan imports 99% of the oil that it consumes. So, if the price of crude oil went up you could expect this to boost Canada’s economy, while stifling Japan’s.
If the fluctuating price of crude oil can strengthen and weaken economies, it goes without saying that it will then have a knock-on effect for that economy’s currency. However, a strengthening economy doesn’t always lead to a strong currency. This is where in-depth fundamental analysis comes into play.
Find out whatever you can about the imports and exports in the countries whose currencies you intend to trade. Establish whether the currency value is currently higher than average and establish whether there are any plans for quantitative easing measures that could play foul to your Forex trading plans. In countries where crude oil is either the number import or export commodity, a big change in the price of crude oil can trigger quantitative easing by their central bank or government.