Energy Rich Currencies

For traders with the patience and financial ability to take long term currency positions in markets that are often fast moving and short term confusing taking long positions in “energy currencies” will likely work out quite well.

By an “energy currency” I mean a currency issued by a nation that has surplus oil reserves and is able to export relatively large amounts of petroleum products to world markets.

An example of an energy currency is the Canadian Dollar.

Traditionally, in spite of the US being an energy deficit nation, the US Dollar has benefited in world currency markets from increasing oil prices as oil transactions around the world are generally priced in US Dollars. Higher oil prices increase the demand for Dollars to pay for oil transactions.

While the world oil market is still primarily priced in US Dollars there is a gradual movement out of Dollars as an oil pricing currency. This is gradually decreasing the demand for Dollars.

Some oil delivery contracts are already being priced in Euros, rather than Dollars. This practice will likely intensify as the US Dollar continues to erode in a peak oil world.

Energy deficient currencies are currencies issued by nations that have an energy deficit. That is, the nations consume more petroleum products than they produce and must import the shortfall.

An example of an energy deficit nation is the United States.

While a strong bull trend in energy currencies may be now underway any currency tends to whip around within the trend. This may create fear and confusion in the forex trader unless you have a written plan for your trade and your positions are well managed.

To take long term positions in currency markets you have to filter out a lot of the daily and short term noise. A good trading plan that states your reasons for making the trade and sets some long term goals as well as reasonable entry and stop loss points will help immensely in filtering out the noise and in keeping you on track.

You should be careful with your entry point even in a strongly trending market. Ideally you will wait to buy an upward trending market until it corrects. So you are buying on weakness.

When you buy near the bottom of a counter trend move, a correction, you limit your risk and usually will show a profit on the trade right away.

Even when you plan to hold your position for the long term a good entry point makes it far easier to stick with your plan.

Over the next few years, as we reach peak oil on a global basis, the greatest transfer of wealth in the history of the world will take place as energy deficient nations have to pay increasing prices for oil and petroleum product imports.

As these funds are transferred to energy surplus nations their currencies should strengthen.

The long term trader can position for the gradual weakening of the US against all major currencies as Dollars are used less and less to price international oil transactions and as the US bill for oil imports continues to increase.

Canada, Mexico, and Russia, are major energy currencies. The Canadian Dollar is by far the easiest one to position as it is freely convertible and trades in world markets with decent liquidity.

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