Crude oil rices skyrocketed from around $60-70 per barrel to amost $150 per barrel in a matter of just few monts in the summer of 2008. No one is sure whether the increase in the prices was due to speculation by the hedge funds. When the stock markets crashed in the middle of 2008, most of the hedge funds had to liquidate their investments in crude oil futures to cover the redemption pressure on them. Prices collapsed and are down now due to low consumer demand because of the global recession. But it is being predicted by the experts that with a recovery in the global economy, the oil demand will rise and the prices will go up again. Oil demand in China and India plays a major role now.

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When oil prices go up invariably recession starts in most economies and stock prices go down. The less the prices become, the more Wall Street becomes exuberant about the profit potential of companies. This increased exuberance translates into increase in stock prices. Two large futures exchanges are used to determine the prices of crude oil. One is the New York Mercantile Exchange (NYME) and the other is the International Petroleum Exchange (IPE).

Historically, rising prices of crude oil have been associated with falling stock markets. NYME is where most of the crude oil futures are traded. By monitoring the movement of the crude oil futures in NYME, you can develop a feel of the future economic situation of the United States. Since oil is heavily traded in US Dollar, this affects the US Dollar. The net effect is however a bit complicated.

But this is not the whole picture. We have to take another aspect into account. Increased oil prices also hurt the US economy. Now, which effect is more important for the currency markets? The effect varies for different currency pairs. Suppose you are watching a currency pair that involves the USD and a currency representing a country that does well during the times of high prices of crude oil.

When oil prices are going to rise again, watch for CAD/JPY currency pair. CAD is positively correlated and JPY is negatively correlated. So CAD/JPY has the strongest reaction to rise in oil prices. It can be a very good currency pair to trade during times of rising oil prices.

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