Oil price and exchange rates

Many analysts argue that there is no direct interaction between the price of oil and exchange rates. They justify their statements by the fact that the oil price is affected only by production volumes without any additional influencing factors. This thesis held for a long time, but the update of new lows for oil revealed some 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 depends directly on the price of oil.

Of course, different countries and their currencies interact differently, but the pattern is clearly visible. For example, countries that do not own black gold are highly dependent on exports, and an increase in the exchange rate will negatively affect the country’s budget, which is directly related to the national currency.

 A decrease in oil prices will always play into the hands of countries that buy it in large quantities, this will allow them to have free funds and strengthen the national currency. Therefore, based on simple logic and without resorting to more specific examples, it becomes clear that any country and its currency are directly related to the oil rate.

Now let's look at the impact of oil prices on a country that is actively involved in production and export. A country that exports oil will always benefit from a rise in its prices, since state profits will grow, which means that the national currency will also strengthen.

However, this thesis does not apply to all countries, since the rise in oil prices also occurs for a reason. For example, raising the price of oil for Saudi Arabia and for the United States will have completely different consequences, since if Saudi Arabia is the leader in sales, its own consumption is much less than that of the United States.

Therefore, when the price of oil rises, the US dollar usually weakens, since this country produces a lot of products, which, as a result of an increase in oil prices, become an order of magnitude more expensive than those of other competing countries. Well, as you understand, a decrease in the competitiveness of products due to their prices entails a decrease in sales, which in turn weakens the economy of the entire state.

That’s why you can always see the response of any currency pair with the dollar when the price of black gold jumps.
One of the most popular instruments that is directly related to oil is the Canadian currency. Canada is a country that is one of the world's top ten oil exporters. Among themselves, traders very often call this commodity currency, since the correlation between oil prices and the Canadian dollar is visible to the naked eye.

Most recently, Canada overtook Saudi Arabia in oil exports to the United States, and as you probably know, the United States is the world's largest consumer of this black gold. Therefore, the sale of oil for Canada plays a very important role in the formation of the country’s budget, despite the fact that it does not consume so much of it compared to the United States. Therefore, as a consequence, an increase in the price of oil always moves the Canadian dollar towards growth, and a decrease in its price always moves this currency towards a fall. You can see such an interesting relationship by opening the dollar/Canadian currency pair and trying to make money on this pattern.

Also, one should not ignore the fact that it is customary to buy oil for the dollar. Therefore, the weakening of the dollar in all currency pairs immediately responds to an increase in oil prices. Naturally, when the dollar strengthens, the price of oil immediately decreases. This is due to simple numbers, because if you have more dollars, you can buy more oil and vice versa.

A separate story happened with the Russian ruble. No matter how economists claim that the ruble exchange rate is in no way interconnected with the price of oil, the masks were thrown off immediately after the collapse of the ruble 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 fall in the price of black gold immediately leads to a deterioration in the Russian economy, and as a consequence to a fall in the ruble itself.

In conclusion, I want to say that no matter how economists and politicians deny the relationship between exchange rates and oil, for pros in stock trading, and even just a sane person, the pattern is clearly obvious. Therefore, not using such knowledge in your work is simply stupid when the obvious facts are obvious. Thanks for your attention, good luck!