Currency trading correlations to Crude Oil prices have broken down through recent energy price rallies, but a significant strengthening in the NYMEX WTI contract’s correlation to the S&P 500 underlines market sensitivity to geopolitical tensions.
Crude oil prices have rallied sharply to multi-year highs as previous and ongoing tensions in the Middle East threaten supplies from several important oil-producing countries. Said moves have not consistently translated into currency rate moves—at least not as far as traditional correlations are concerned. In fact, the short-term link between the US Dollar/Canadian Dollar currency pair has weakened considerably through recent moves.
The NYMEX WTI contract seems strongly correlated to the S&P 500. Such a link emphasizes that geopolitical tensions may continue to move markets through upcoming trade.
Forex Correlations Summary
Forex correlations against Oil, Gold, and the Dow Jones Industrial Average for the past 30 calendar days:
Read a guide on understanding the forex correlations summary chart.
US Dollar/Canadian Dollar and NYMEX WTI Crude Oil Contract
The correlation between the Canadian Dollar and Crude Oil prices has all but broken down through recent trade, in fact turning positive on a very short-term basis. Said moves suggest that the USDCAD has mostly lost its luster as a proxy for oil price speculation. The fact that recent COT data shows Non Commercial Traders very heavily net-long the Canadian Dollar against its US namesake warns against taking aggressive short positions through upcoming trade.
US Dollar Index and NYMEX WTI Crude Oil Contract
The US Dollar Index has likewise most lost its close link to oil prices. The Greenback had previously been negatively correlated to moves in oil futures, but the recent surge in oil prices has not necessarily translated into commensurate USD tumbles. The weakened link suggests that the US Dollar is largely disconnected to recent moves in commodity markets. Dollar declines instead seem a function of a longer-standing downtrend and not necessarily linked to other markets.
US S&P 500 and NYMEX WTI Crude Oil Contract
The S&P 500 is the one of the few assets that has seen its correlation to Crude Oil prices strengthen considerably through recent trade. The index has fallen noticeably on surges in oil prices, and recent trends suggest it is likely to continue doing so amidst global geopolitical tensions. This is a noteworthy departure from just months ago when both asset prices were driven higher by financial market risk sentiment. Oil is now moving like a safe-haven asset on considerable uncertainty in the Middle East.
Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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