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Energy Crisis Shapes the FX Winners and Losers

Posted: Thursday, October 21st, 2021

Estimated Reading Time: 2 minutes

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The surge in energy prices continues despite impressive rallies in many markets. Oil prices are at  2021 highs; after rallying all year, copper and natural gas rise was simply vertical.

With winter approaching in the Northern hemisphere, the pressure on the region’s countries will likely increase. Economies and households will have a hard time coping with the rising prices as the energy bills keep rising.

Is there a spillover to the currency market? It most certainly is.

Energy Crisis

How the Energy Crisis Is Moving the Currency Market

The chart above shows the winners and losers of the energy crisis, in terms of which economies (and therefore, their currencies), would benefit and which won’t. The U.S. dollar is right in the middle, but the Australian dollar or the Canadian dollar should benefit from the energy crisis because the Australian and Canadian economies are more than self-sufficient on energy.

Simply put, they are net exporters, and their economies and currencies benefit from the higher energy prices. At the opposite end of the spectrum, the Euro area is not self-sufficient on energy and neither is Japan.

The chart perfectly explains the recent moves in the FX market. First, the Japanese yen is dropping like a rock, with the movement gaining speed recently. Both the EUR/JPY and USD/JPY stand at 2021 highs.

Second, the Australian dollar outperforms the euro or the Japanese yen, or even the U.S. dollar. All these currencies are on the left side of the chart, and therefore is impossible not to make a connection.

In other words, those willing to take the other side of the trade, or contrarian traders, might want to check first the energy prices before taking a trade. In other words, it would be best for the energy prices to consolidate or reverse before taking a trade in the opposite direction.

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