How OPEC Affects the Forex Markets (Part One)

05/15/2009 12:01 am EST

Focus: FOREX

John Jagerson

Co-Founder and Contributor, LearningMarkets.com

What really drives oil prices is a subject of much debate. There are a lot of industry professionals who maintain that it is a supply side market only versus others who suggest that speculators and the demand side drive oil prices. I think this is a relevant discussion for forex traders as we deal with the impact on currency prices attributed to oil and commodity market fluctuations.

Part of the debate stems from the impact of the actions of OPEC. This 13-member cartel of oil producing nations has been in the news lately and is being watched by traders seeking to find some direction in the rallying energy market. OPEC's influence in the market has diminished from their legendary status of decades ago as external oil fields gain prominence in world demand, but they are still an important factor.

OPEC will attempt to intervene in the market through verbal intervention and by taking action and constraining production levels and caps. Depending on the other forces at play in the market, these measures may have little or no effect. In many ways, traders may pay attention to the actions and announcements from OPEC like they would a central banker. The information is useful and should be watched, but it is not reliably predictive of future price trends.

Understanding the impact that OPEC has on the energy market is only half the problem. Forex investors also need to understand why oil prices are correlated with the commodity currencies—even those currencies in economies that are not major oil producers. In part one of today's video, we will look at the impact that OPEC has on the energy market before we discuss why falling energy prices and falling commodity prices in general can contribute to such dramatic swings in the value of the major commodity pairs.

Check out today's video to learn more about OPEC and it’s impact on the forex markets, and click here to learn more about trading other commodities (like gold).

By John Jagerson, of PFXGlobal.com and LearningMarkets.com.

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