Why is OIL a Popular Asset for Trading
Oil is a fascinated product that changed that way we live our lives forever. Since its discovery, humankind leapfrogged into the future, with almost everything that surrounds us nowadays having something to do with oil.
Just think of any day in your life: traveling by plane, consuming electricity, driving a car, drinking from a plastic bottle, and many, many more examples like these reflect the importance of oil in the 21st-century.
But oil is not only that. Oil is one of the most popular trading assets part of a brokerage house offering.
The modern Forex broker offers access to much more than the traditional interbank market. Because of that, traders can speculate on the future price of oil from the same account where the Forex trading takes place.
Why Forex Traders Look at the Price of Oil
Despite ignored by many, the price of oil has a critical role in the Forex market’s volatility. The reason comes from the strong inflationary component it has.
The right Forex education course will highlight the price of oil as one of the most critical drivers in the FX volatility. It all comes down to central banks and the interest rate levels they set.
When deciding on the interest rate level (which drive up or down the level of a currency), central banks consider inflation. They target inflation below but close to two percent.
However, the primary driver for inflation is the price of oil. In fact, there is a powerful, direct correlation between the two: higher oil prices lead to higher inflation, while lower oil prices to lower inflation.
Hence, the central banks around the world will quickly adjust the interest rate level based on what inflation (and the price of oil), does. But this is no secret to the savvy retail trader, and, because of this, oil is a vital trading asset to keep an eye on.
Moreover, the FX trading world, the price of oil has a direct correlation with one of the most popular currencies: the Canadian Dollar (CAD).
Because the Canadian economy depends on the oil market (a big chunk of its GDP – Gross Domestic Product comes from oil-related businesses, both upstream and downstream), the CAD follows the price of oil most of the times.
The easier way to spot the inverse correlation is to check the USDCAD price evolution based on how the price of oil changes. It shows that the USDCAD rises when the price of oil declines, and the other way around too.
For traders interested in the CAD Forex pairs, the price of oil is essential. However, not CAD traders, but all traders willing to diversify their portfolio as part of the money management system, look at the price of oil as a viable option.
Like any commodity, the price of oil depends on the imbalances between supply and demand levels, which makes production levels and new oil reserves discoveries as important elements. Also, inventory levels are closely watched as they tell much about where the price of oil will go next.
Armed with such information regarding the price of oil, traders speculate on CAD pairs, but also on the next move the central banks around the world will do with the interest rates.