Asia Times: Oil, the yen and the Canadian dollar

[unhappycamper]

Oil, the yen and the Canadian dollar
By Kathy Lien
Aug 30, 2005

Oil prices have been skyrocketing over the past few weeks, increasing close to 45% in the past three months and now crossing US$70 a barrel. Gasoline prices in certain US states have already breached $3 a gallon. It seems as if it was only yesterday (or less than one year ago) that traders were claiming $40 would be the highest that oil prices could rally. Now in retrospect, in the minds of many of those same traders, $40 seems to be the lowest that we could see oil prices fall to once again.

The sharp surge in energy prices has nearly everyone scratching their heads about where oil prices may be headed next and what currency pair they could trade to profit from that view. Some oil traders are calling for $80 a barrel while more aggressive ones are setting their sights on $100. Yet, in every scenario there are skeptics who also have valid arguments and in this case, oil skeptics are calling the rally a speculative bubble that will burst sooner or later. However for the actual majority that are banking on higher oil prices, trading currencies instead of oil may be more profitable endeavor due to the unique ability to earn not only capital appreciation, but also interest income, something futures contracts cannot offer.

The rise in oil has made headlines across the globe for months now. Strong demand from China and India, the lack of ability by Saudi Arabia (and other OPEC countries) to increase oil production as well as weather-related supply shocks have fueled the continual rise in crude prices. From our economics textbooks, we remember that high oil prices act as a tax for consumers by slowing down consumer spending, which eventually takes a bite out of growth. Yet the actual impact of oil prices on different currencies can be very mixed. Some currencies stand to benefit significantly from rising oil prices while others suffer greatly. Traditionally we know that commodity currencies (the currencies of countries which are dependent on the export of particular commodities, eg the Australian dollar or the South African rand) rally when energy prices increase because many of these countries are also net exporters of crude oil; that is, there is considerable overlap between the commodity-exporting countries and the oil-exporting countries. Therefore the oil producers within these countries are simply reaping higher profits for the same barrel of oil. Currencies of countries that are net oil importers, on the other hand face, increasingly higher costs whenever energy prices rise. So taking a look at this from a net oil exporter/importer perspective, the currency pair that should be impacted the most by changes in energy prices is the Canadian dollar and the Japanese yen (CADJPY).

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http://www.atimes.com/atimes/Global_Economy/GH30Dj01.html

[ragin_acadian]

1. i just got back from Canada,

gas was $1.12/liter - or $4.50 per US gallon, roughly.

why is gas so cheap in the US?

[n2doc]

2. low gas taxes

Canada follows the euopean model of having high gas taxes to discourage consumption and pay for other things.