Forex Correlations to Crude Oil Support US Dollar Outlook
The correlation between the US S&P 500 and the NYMEX WTI Crude Oil contract trades at record negative strength, emphasizing that oil price rallies have coincided with strong declines in risky asset classes. The link between the Euro/US Dollar and oil prices has likewise turned negative at points, and indeed we believe that a sharp oil price surge could provide the catalyst necessary to force a larger US Dollar recovery.
Though this may seem counter intuitive, Crude Oil strength would likely come as a result of continued geopolitical tensions in the Middle East and ensuing safe-haven flows could benefit the beleaguered Greenback.
Forex Correlations Summary
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US S&P 500 and NYMEX WTI Crude Oil Contract
The correlation between the US S&P 500 and the NYMEX WTI Crude Oil Contract trades very near record strength, as sharp rallies in crude oil prices have led to similarly pronounced declines in equity markets. The close link between oil and risk suggests that traders should keep a close eye on the trajectory of energy prices and monitor financial risk sentiment accordingly. A sharp rally in oil could, perhaps counter intuitively, produce the spark needed for a broader US Dollar bounce.
Euro/US Dollar and NYMEX WTI Crude Oil Contract
The strong correlation between Crude Oil and the S&P 500 explains the very much weakened link between the WTI contract and the Euro/US Dollar currency pair. Such a strong shift in market dynamics indeed suggests that a major Crude Oil price rally could actually result in US Dollar strength. This is admittedly quite counter intuitive, but recent energy price rallies have been directly linked to increased geopolitical turmoil in the Middle East. Continued troubles could provide catalyst for a flight to the safety of the US Dollar.
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.
Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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