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Crude Oil Tumbles Could Force US Dollar to Surge vs. Canadian Dollar

By , Quantitative Strategist
08 May 2012 15:30 GMT

Sharp losses in Crude Oil prices have sent the US Dollar (ticker: USDOLLAR) higher against the Canadian Dollar, and further losses would favor USDCAD gains.

Commodities such as Crude Oil, Gold, and Silver have sold off sharply amidst clear tensions across financial markets—sending the US Dollar higher. This effect is particularly pronounced against commodity-sensitive currencies such as the Canadian Dollar, Australian Dollar, and New Zealand Dollar.

The short-term correlation between Crude oil prices and the Canadian Dollar trades near record strength, and further Crude Oil weakness would likely result in USDCAD gains. The NYMEX contract trades dangerously close to year-to-date lows near the $95.44. A substantial break lower could force the USDCAD to trade above critical resistance at C$1.0050.

Forex Correlations Summary

View forex correlations to the SPDR Gold ETF Trust (GLD), United States Oil Fund ETF (USO), SPDR Dow Jones Industrial Average ETF Trust (DIA), UK FTSE 100 Index, and IShares Silver Trust ETF (SLV) prices.

GLD

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

-0.55

-0.14

-0.61

-0.14

0.46

0.62

0.17

1 Month

0.41

0.24

-0.45

0.43

-0.09

0.51

-0.56

3 Month

0.47

0.20

-0.20

0.41

-0.18

0.40

-0.48

1 Year

0.18

0.16

-0.18

0.24

-0.17

0.24

-0.27

USO

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.32

0.11

0.80

0.13

-0.69

0.42

0.06

1 Month

0.53

0.31

0.22

0.57

-0.61

0.63

-0.45

3 Month

0.40

0.35

0.19

0.53

-0.53

0.56

-0.39

1 Year

0.47

0.36

-0.01

0.63

-0.62

0.58

-0.52

DIA

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.48

0.09

0.91

0.06

-0.74

0.20

0.09

1 Month

0.57

0.41

0.34

0.66

-0.77

0.59

-0.49

3 Month

0.44

0.44

0.30

0.61

-0.69

0.55

-0.40

1 Year

0.65

0.55

-0.07

0.80

-0.82

0.75

-0.69

FTSE100

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.86

0.22

0.90

-0.15

-0.73

-0.01

0.05

1 Month

0.64

0.45

0.49

0.57

-0.75

0.57

-0.42

3 Month

0.47

0.40

0.25

0.62

-0.71

0.59

-0.42

1 Year

0.47

0.38

-0.03

0.70

-0.67

0.65

-0.56

SLV

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

-0.34

-0.25

-0.45

-0.39

0.42

0.56

0.40

1 Month

0.58

0.45

-0.07

0.56

-0.35

0.59

-0.60

3 Month

0.54

0.35

-0.12

0.57

-0.44

0.57

-0.57

1 Year

0.33

0.26

-0.14

0.39

-0.37

0.38

-0.39

Perfect Positive Correlation:

1.00

Perfect Negative Correlation:

-1.00

forex_correlations_us_dollar_crude_oil_canadian_dollar_body_Picture_1.png, Crude Oil Tumbles Could Force US Dollar to Surge vs. Canadian Dollar

US Dollar/Canadian Dollar Exchange Rate (lhs)

NYMEX West Texas Intermediate Crude Oil (rhs)

Correlation between US Dollar/Canadian Dollar Exchange Rate and Crude Oil Prices

The US Dollar (ticker: USDOLLAR) remains strongly correlated to oil prices, and that link is especially strong between the USD/Canadian Dollar exchange rate and the NYMEX WTI Crude Oil Contract. The Canadian Dollar sold off sharply (USDCAD rallied) as oil prices saw their biggest single-week decline since September, 2011.

If we go back to similar moves in 2011, we saw the USDCAD rally from C$0.9800 to highs of C$1.0660 in mere weeks. But the NYMEX Crude Oil contract fell from $90 to $75 in that same stretch—good for a 17% decline. A similar peak-to-trough move would put the front-month contract at $88; it traded at $96.50 at time of writing.

Could another $8.50 decline in Crude Oil prices be enough to push the USDCAD to $1.0660? History says it should be. Yet Canadian Dollar positioning shows a surge in speculative USDCAD short positions. In other words—many people are positioned for weakness and would not likely let the USDCAD break higher without a fight.

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com

To contact David, e-mail drodriguez@dailyfx.com

To be added to David’s e-mail distribution list for this and other reports, e-mail subject line “Distribution List” to drodriguez@dailyfx.com

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08 May 2012 15:30 GMT