On 29th September 2016, OPEC announced that its member states had agreed to decrease production of oil by one to two percent. But why would the 14-state organization that has a third of the world’s oil reserves come up with such a decision? prices have been plummeting in recent years. OPEC countries have had varied economic consequences as a result. In Saudi Arabia, a founding member of OPEC, low oil prices have led to salary reductions of government officials and a reduction of subsidies for the largely middle-class population. OPEC aims to bring the prices up to about fifty dollars a barrel in a few months.
The impact of oil prices on foreign currencies cannot be understated. The world’s modern nations can be divided into two; oil exporters and oil importers. When oil prices take a hit as they have been doing since 2014, currency values of oil exporters dip while those of oil importers become strong. For example, two major oil exporters are Canada and Russia. Since 2014, the Canadian dollar and Russian rubles’ values continue to swing back and forth, favoring the lower end. In Japan on the other hand, the Yen continues to grow steady.
So can we conclude that OPEC’s latest decision will strengthen currencies such as those of Saudi Arabia and make other currencies swing? To effectively answer this question a few things must be considered.
The most important factor to consider is the central bank policies of particular countries. Some countries have a floating exchange rate. This is an exchange that is controlled by demand and supply equations. Countries with this type of policy usually have the least steady currencies. OPEC’s oil production cut is expected to impact such currencies depending on whether they are importers or exporters. In the coming few months we expect to see a strengthening of Canadian dollar and the Russian currencies against the dollar.
Another central bank policy adopted by some countries is the fixed exchange rate. Those countries with fixed exchange rate ensure that their currency value remains the same by cutting back on other areas of the economy. Some countries’ central banks cushion their currencies by managing their floats. Countries with these two kinds of policies have stable currencies. OPEC’s latest decision will have little or no effect on such currencies. Saudi Arabia is one of these countries. Despite oil price effects on other areas of the country’s economy, its currency continues to remain bullish against the US dollar and it is unlikely to change in the coming months.
SO HOW CAN A FOREX TRADER MAXIMIZE ON THE IMPENDING OIL PRODUCTION CUT BY OPEC COUNTRIES?
- Realize that an oil production cut is likely to send oil prices up and promote economies of oil producing countries. Remember that some countries have a floating currency policy and others have a fixed currency policy. Trade more in currencies of oil exporting countries that have a floating exchange rate policy to get the maximum returns. The most profitable pairing would therefore be of an oil exporter with a floating currency versus an oil importer with a floating currency. A good example is the Canadian dollar against the Japanese Yen.
- It would be important to note that oil prices are not going to continue soaring forever. It will reach a point where consumers will not be able to take it anymore and they will cut back on their purchase. At this point, oil prices will either plummet or become stable. Floating currencies of exporters and importers will follow these oil prices. Traders should keenly analyze these trends in the coming months if they don’t want to lose out.
- Also, note that oil prices affect the overall economy of most countries. Most countries depend on petroleum for their energy needs. A higher oil price will send prices of commodities spiking and vice versa. The state of the economy affects many countries’ currency.
- Correctly predicting OPEC’s effect on forex trading is no mean feat. Many factors have to be considered. Traders looking to make handsome profits from the trade should look for expert analysis from experienced forecasters and brokers like CMC Markets.
OPEC’s timely decision will certainly have a huge impact on the forex market. Whether or not it brings good tidings to forex traders will be determined in the coming months.