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The Oil Crash And The FX/Crypto Markets
- Why did oil prices crash?
- How did this affect Forex and Crypto markets?
- How will this influence your trading?
For the first time in history, crude oil prices fell below zero on Monday 20th April 2020. The long-term effects of this drop are still unknown. However, it signified a complete change in the universally accepted perceptions of commodities. It signified that commodities, such as crude oil, do in fact have a floor. They could also fall below $0.
But what lead to this collapse in oil demand? How does this affect the forex and crypto markets? And more importantly, how will this affect your trading from now on?
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Why Did Oil Prices Crash?
The Covid-19 crisis left highways empty in March and April 2020, shut down industries, and forced millions of people to stay at home. In turn, this led to a complete collapse in the demand for oil. Ongoing price wars between Saudi Arabia and Russia did come to a halt. This was not enough to make up for the collapse in demand for crude oil. Consequently, all these factors set the stage for the markets to dip alarmingly low.
How Did This Affect Forex and Crypto Markets?
The drop in oil prices left financial markets in an uncertain state that affects both crypto and forex markets and indices’ volatility.
Following the crash of ‘black gold’, the top cryptocurrency Bitcoin faced rejection above $7,200, according to CoinDesk’s Bitcoin Price Index. Speculators are insisting that the value of BTC may be linked to losses in the equities market, rather than the fall in demand for crude directly.
Apart from the expected downward trend in the crypto market, cryptocurrencies are being affected by another argument.
The Commodity Futures Trading Commission (CFTC) and other regulators classify Bitcoin as a financial commodity. Opinionists are comparing Bitcoin to crude oil given that both are technically commodities.
An interesting argument contemplates a financial commodity’s value and whether it is based on another commodity. What if that commodity is trading at negative prices? Due to this, it is claimed that oil prices falling below $0 might open the door for Bitcoin ETFs. Market liquidity would help the price of ETF to regulate the market value of such an underlying asset and so enabling transparency for all investors.
The price of crude oil and currencies are interchangeably linked. When one of these variables rises or falls, it is bound to force a reaction in the other. Why? Resource distribution, the psychology of the market, and the balance of trade amongst others.
Given that oil is quoted in USD, the US dollar was affected very negatively by this drop in oil prices. Economists claim that the worst is yet to come since ongoing problems on the oil front could easily lead to the collapse of the dollar.
Business activity in the Eurozone slumped to record lows this April. It was aided by other factors pertaining to the Coronavirus pandemic which is sweeping the continent.
How Will This Influence Your Trading?
It is worth noting that a week after it happened the markets are already recovering. The price of the key U.S. benchmark West Texas Intermediate skyrocketed to 18% in early trading this morning. Despite this, analysts predict more ‘carnage’ as the virus continues to inject imbalances across all financial markets. One thing is for sure though. Trading on the oil market right now will most definitely have a negative impact on your trades. Instability will remain at an all-time high.