There are two types of “economics”, “professors’ economics” & “traders’ economics“.

If you want to apply “fundamentals” to currency trading you must be able to do what I call “relational analysis”. One of the foundations of relational analysis is “traders’ economics“.  Traders’ economics wont get you straight As for your PhD at Harvard but it might just keep you at the right side of the prevailing currency market trends.

Here is an example of traders’ economics and how to apply it and relational analysis as part of your currency market views.

Chicken or Egg?  What’s first? / High oil or low $$$?  What’s first?

I find this debate about the value of the low USD and the high oil pretty strange if not amusing and a bit silly.

In short there are a number of commentators and comments doing the round that oil is high because the dollar is weak and secondly calls from generally US patriots that the Fed must strengthen the USD to alleviate the oil problem, halt global warming and fix the hole in the Ozone layer too boot.

As if it is so simple as a central banker snapping his fingers and a currency take a sustained new path.

There was a time that especially Europeans were calling on the Fed / Americans to please, please stop saying they believe in a strong dollar policy but not doing anything about it.  Now the Fed is still believing in a strong dollar, realize they can’t do anything about it and pleads with everybody else to debase their currencies to help out the Fed!  What a joke.

Here is why.

These days oil clearly is more important for the day to day generally efficient
running of lives than for instance gold and as such in our world @ speed of
light oil is vastly more valuable for homo economicus, especially now that large parts of the global population are exponentially increasing their wealth and start amongst other things to buy motor cars at a hectic pace.  (I heard yesterday that China currently have less than 5 cars per 1000 people, the world average is just over 100 and the US is something like 760.)

You with me?

Now let’s see how truthful this story
that oil is high because the dollar is low is.

I suspect it is
bogus.

Oil is important and its importance is on the increase.  And
its importance is in its price. (The corollary is that the USD is losing value because it is losing importance in a globalized world where economic power is becoming more and more decentralized and this is also in the USD price.)

You see oil is as high as it is when expressed in US $$$ because the USD is weak.  (Now if you think oil is high in USD try buying a barrel of oil with your container of Zim $$$ -:) )

BUT, take AUD for instance.

For Ozzies oil is also high because it is valuable, scarce, in demand etc in Australia, but oil is not as high in Ozzie dollars as in USD.

What is the rise % wise of oil since the Iraq war
has started when expressed in AUD?  A quick glance at a chart of AUDUSD from March 2003 to July 2008 tells the story.

That is a 60% rise in AUD vs USD since the Iraq war.  Now if I understand the talking heads they reckon amongst others the Ozzies must weaken their currency against the USD in order for the oil price to drop.  I am confused!

You see, these days oil is high for everybody, but if you
pay for oil in USD (like everybody does) and you must exchange whatever you have for USD first to pay for your oil and you can
get more USD for what you have, then your oil costs relatively less. But if your currency
weakens against the USD you get less dollars and pay more for the oil you
want.  As I say, who in his right mind will voluntarily do that at this stage?

But
what you can do is to make sure you pay less by getting more USD for your
currency.  OK, that is not so easy to achieve for a central bank but what you
really won’t like to stand and defend even as a moronic politician is why you
debase the currency to make the stuff even more expensive … and that while almost every soft or hard commodity you have to buy is also at the top of its historic price levels?

How can this benefit you?

Well I think the main benefit of this insight is that you should keep
in mind that talk is cheap, oil not and when you have to pay money
(especially millions and billions) people usually make rational
decisions with their own self-interest at heart and they leave their
altruistic tendencies at home.

So, maybe you should just slightly re-weight the potential of a drop in
the oil price to make a big change in the value of the US dollar.

Godspeed
DrForex
“Chance favours the fundamentally prepared trader”