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Fundamental Analysis In Forex Trading
Fundamental Analysis:The price of light sweet crude oil can have a tremendous effect on the FX market, specifically affecting currencies such as the Canadian Dollar (CAD), U.S. Dollar (USD), as well as the Japanese Yen (JPY) for somewhat different reasons. In fact, as oil has broken above the $50 psychological level, the impact of high oil prices continues to have a severe impact on the global economy. The following daily chart illustrates the rally oil has enjoyed over the course of the past year. Note the price of oil as well as the corresponding price of the USD/CAD during the same period of time. CAD: Oil represents around 8% of the Canadian economy, therefore for every dollar higher the price of oil moves, the Canadian economy tends to benefit. On the other hand, if oil moves to the downside, the Canadian economy tends to suffer. The Canadian economy depends on exports such as Lumber, Oil, as well as consumer staples such as wheat and other grains. Being the ninth largest producer of crude oil in the world, ‘‘ Canada’s currency has a strong correlation with oil prices. In fact, over the past year (2004-200 5), the weekly correlation has been close to 70%. This means that if oil prices rally, the Canadian dollar also has a high likelihood of rallying, but unfortunately the pitfall of this relationship is that the opposite scenario is true as well. When oil prices fall, the Canadian dollar will also fall. Higher commodity prices have benefited resource- rich Canada, but have hurt Canadian exports to countries such as the US. which accounts for two thirds of exports from Canada? USD: Canada is the number one supplier of oil to the US; in fact the US consumes more oil from Canada than from the Middle East. Due to the fact that the US and Japan are considered very industrialized nations, high oil prices tend to cut into the US’s ability to stay productive. High oil prices can have a sever effect on such industries such as the Airlines, Chemical, Automotive, and Industrial Production. The price of oil has a very strong correlation or relationship to the USD/CAD. USD/CAD: In fact the USD/CAD pair has a “double barrel” reaction to the change in the price of oil. As oil moves higher, it tends to benefit the CAD while putting a strain on the USD. For that reason, the USD/CAD tends to move with swift reactions as the price of oil moves higher or lower. As oil traded near the psychological $50/barrel, the USD/CAD traded near the 1.2500 large round figure. As oil crossed above $50, the USD/CAD sank below 1.2500. The opposite also holds true. As oil subsequently fell below $50, the USD/CAD broke above 1.2500. Traders who realize this inter market correlation can trade the FX market with a bias, depending on its respective commodity market. JPY: Japan imports 99% of the oil they use, as they are also considered a highly industrialized economy. Their economy tends to benefit when oil prices decline, as their economy is usually put under strain during periods of higher oil prices. Most major industries such as the Auto and industrial production industries depend on oil on a day-today basis. As the price of oil has continued to rise over the course of the past few years, Japanese industries are not able to sustain the same level of growth over the long term due to this increased cost of production. Because oil can have such a severe impact to not only the JPY economy, but also the US and major European economies, it is one of the most widely watched commodities. We may not see this correlation on a day-to-day, minute-to-minute basis, however it is important to note these inter-market relationships and how they influence the long-term trends.
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