What Does the Retreat of Crude Oil Prices Do to the Forex Market?

Last year OPEC agreed to production cuts in order to raise the price of crude oil. US oil prices went from $45 to $55 a barrel within a month. But now US crude prices have fallen again close to $45 a barrel and the fall in commodities is not limited to oil. Bloomberg writes about a bad week for oil and iron ore.

Within minutes of U.S. crude-oil futures tumbling through $45 a barrel, signs of a broader risk-off swing started to emerge in markets, exacerbating what was already brewing as a worrying week for commodities.

Oil’s retreat to a level not seen since OPEC forged its landmark agreement to cut output last November stoked declines from iron ore to industrial metals and losses that many commentators had been putting down to individual supply and demand factors. The deterioration in sentiment carried through to the currency market, where the key risk barometer in Asia – the yen – spiked higher against the dollar as stock losses from Australia to Hong Kong gathered pace.

When OPEC cuts production other producers commonly increase theirs in order to take advantage of better prices. US shale fracking producers are a case in point as they have upped production. But iron ore is down because of decreased demand and that makes people think of recession. Thus Forex traders begin of look for safe haven currencies in order to park their money. Recently on our sister site, Profitable Investing Tips, we speculated about investing when automation takes away jobs, growth slows and there are too much oil and steel as well as too many workers.

Proponents of automation envision a world of plenty with resources shared by all. But the real result of automation has been increased production coupled with fewer jobs. Workers produce products and they get paid. Then they use their money to buy products. And manufacturers turn around and produce more products. But when fewer workers make products there are fewer people with money to keep the cycle going.

This ends up as a recipe for a slow growth world. In the world of Forex this sort of situation is worse for developing nations because they are so dependent on exports of commodities. On the other hand nations with high tech and cutting edge industries will continue to profit and their currencies will prosper. Thus the first tier of nations, especially the major Forex currencies, will more forward while many minor currencies will suffer. Exceptions in the minor currency world will include Korea, Taiwan, Hong Kong, Scandinavian countries because of their access to high tech skills and highly organized societies. In the major Forex currency world both Canada and Australia will suffer because of their high reliance on exports of commodities. The so-called Trump trades of the US dollar versus the Mexican peso or Russian ruble have largely reversed as Trump seems less in love with Russia and Mexicans have called Trump’s bluff. Mexico is in a better position to keep exporting to the USA while Russia is hit again by the drop in oil prices.