Oil prices and exchange rates

Many analysts argue that there is no direct correlation between oil prices and exchange rates. They justify their assertions by arguing that oil prices are driven solely by production volumes, without any other factors. This assumption has held for a long time, but the recent record lows in oil prices have revealed certain patterns that more experienced traders had long suspected.

We all understand that oil is a product without which the chemical industry cannot exist, therefore, any country in this world is directly dependent on the oil price.

Of course, different countries and their currencies interact differently, but a clear pattern is evident. For example, countries that don't possess black gold are highly dependent on exports, and an appreciation of the exchange rate will negatively impact the national budget, which is directly related to the national currency.

 Lower oil prices will always benefit countries that buy large quantities of it, as this will allow them to have available funds and strengthen their national currencies. Therefore, using simple logic and without resorting to more specific examples, it becomes clear that any country and its currency are directly linked to the price of oil.

Now let's consider the impact of oil prices on a country that actively produces and exports oil. A country that exports oil will always benefit from higher prices, as government profits will increase, which means the national currency will also strengthen.

However, this thesis doesn't apply to all countries, as rising oil prices also occur for a reason. For example, an increase in oil prices would have very different consequences for Saudi Arabia and the US, since Saudi Arabia is the leading oil seller, while its own consumption is much lower than that of the US.

Therefore, when the price of oil rises, the US dollar typically weakens, as the country produces a large amount of goods, which, as a result of rising oil prices, become significantly more expensive than those of other competing countries. As you can imagine, a decrease in product competitiveness due to price leads to a decline in sales, which in turn weakens the entire national economy.

That's why you can always see the response of any currency pair to the dollar when the price of black gold fluctuates.
One of the most popular instruments that is directly linked to oil is the Canadian dollar. Canada is one of the world's top ten oil exporters. Traders often refer to it as a commodity currency, as the correlation between oil prices and the Canadian dollar is obvious.

Canada recently surpassed Saudi Arabia in oil exports to the US, and as you probably know, the US is the world's largest consumer of this black gold. Therefore, oil sales to Canada play a very significant role in the country's budget, despite its relatively modest oil consumption compared to the US. Consequently, rising oil prices always push the Canadian dollar up, while falling oil prices push the currency down. You can see this interesting relationship by opening a USD/CAD currency pair and trying to profit from it.

It's also worth remembering that oil is traditionally purchased for dollars. Therefore, a weakening dollar across all currency pairs immediately triggers a rise in oil prices. Naturally, when the dollar strengthens, the price of oil also falls. This is due to simple numbers: if you have more dollars, you can buy more oil, and vice versa.

The Russian ruble was a different story. Despite economists' insistence that the ruble's exchange rate is unrelated to the price of oil, the masks were dropped immediately after the ruble's collapse due to the fall in oil prices. The fact is that the price of oil is a budget-forming factor in the Russian Federation, so a drop in the price of black gold immediately leads to a deterioration in the Russian economy and, consequently, to a decline in the ruble itself.

In conclusion, I'd like to say that no matter how economists and politicians deny the relationship between exchange rates and oil prices, for experienced stock traders, and even for anyone with common sense, the pattern is clearly evident. Therefore, not using this knowledge in your work is simply foolish when the obvious facts are so clear. Thank you for your attention, and good luck!