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Jessica Kerry

Effect of volatile oil market on Forex

Question

Hi there,

The crude oil market has been highly volatile in the last number of weeks. How is this likely to affect the Forex market?

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Hi Jessica,

Currencies and Oil have an inherent relationship. Price action in one forces a negative or positive reaction on the other’s prices, especially in nations with big reserves. For the first time, oil futures have ventured into negative territory because of a supply surplus, coupled with a lack of enough storage space to park the excess.
Due to this surplus, WTI crude made its lowest close in decades. If the world economy begins to show recovery, the current situation will be a long-term low in price. As such, the market is very volatile, with crude trade a highly risky business currently.
Forex Market Effects
Sharp market movements are opportunities to trade in Forex pairs exhibiting negative or positive crude oil correlations. Proficient day traders would find trading in currency pairs resting on crude oil attractive. The attractiveness rests on high volatility, creating profits through trading the swings in shorter time frames.
This all means a crude oil stock market-related crash creates opportunities to be long on common crude oil Forex pairs. On the flip side, when the market finally turns positive, an opportunity for going short on crude oil Forex pairs arises.
 

 

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