Few stories have been as important in recent economic news as that of plunging oil prices. This hasn't just been a one or two month dip: oil prices have plunged for almost a year, and with those dropping prices came huge drops in gasoline prices. Even more remarkable has been the impact on Forex markets, because these plunging oil prices have caused some powerful changes in currency value. Oil as a commodity has a powerful effect on certain major currencies, and that can spill over and affect many currency pairs and all the trades they're involved in.


      Examining the Tight Correlations
  While oil prices have a strong economic impact in general, there are certain nations that have a very tight correlation to this natural resource. The Canadian Dollar (CAD) has a positive correlation with the price of oil. When oil prices are high, the CAD tends to be very strong against other currencies, because they are a heavy exporter.
 
   The drawback is that when oil prices fall and keep falling, the value of Canada's currency also falls. The past year has shown that, as in August of 2015 the Loonie dropped to an 11 year low against the U.S. Dollar. This is great for Forex traders betting on the strength of the USD against the CAD, but ruinous for traders on the other side of that equation.
 
   Interestingly enough, the CAD based pairs in the Forex market are the ones that are overwhelmingly affected compared to others.
 
   There are other nations heavily affected negatively by falling oil prices, but the ones most bothered are:
- Norway
- Russia
- Mexico
- Brazil
 
   Unless you're trading in minor currencies, this is not going to spill over into most trades with major currencies.
 
    Japan Becomes Stronger
   On the complete other side of the spectrum from Canada is Japan. Japan is a highly industrialized nation, yet they must import 100% of their oil for consumption, meaning they do poorly when oil prices are high but tend to get a really strong boost when oil prices plummet like they have over the past year.
 
   The Yen (JPY) hasn't had as strong a boost as you might expect based on how dramatically the prices fell, but Japan has been dealing with a whole host of problems stemming all the way back to the Great Recession of 2008. Unlike the United States and many other first world nations, Japan has yet to have the full bounce back that many other areas have experienced. Even with a host of other problems, the falling oil prices have definitely helped to stabilize and even strengthen the JPY, though not nearly to the extent that the CAD has fallen.

     So What Does This All Mean?
   While different reports and circumstances can change things, generally speaking, when it comes to trading the Forex, you can count on the CAD becoming weaker when oil prices plummet and the JPY becoming stronger. The role reverses when oil prices rise, giving two currencies to clearly keep an eye on whenever dramatic movement is happening with oil - and the trend isn't going to be bucked until the price of oil hits more traditional levels once again - something that looks like it might not happen for quite some time.
 
About the Author
Brooks Allisen has had a successful career buying and selling gold and precious metal stocks and options for more than 15 years. This up and coming author discussing the six types of gold investors also has a popular website and provides valuable information about investing in gold. To learn more, visit <a href=”buygold.mywebpal.com”>buygold.mywebpal.com</a>.