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Crude Oil Tumbles Offer Trade Setups in the Canadian Dollar

Crude Oil Tumbles Offer Trade Setups in the Canadian Dollar

2012-06-05 21:20:00
David Rodriguez, Head of Product
Share:

Sharp Crude Oil declines may just be the start of a reversal from yearly peaks, and forex correlations suggest the US Dollar/Canadian Dollar exchange rate offers an attractive proxy to trading oil contracts.

The NYMEX West Texas Intermediate Crude Oil contract has fallen to its lowest levels in nine months, and the US Dollar (ticker: USDOLLAR) trades just short of multi-year peaks against the commodity-driven Canadian Dollar. Our correlation studies show that the link between the USDCAD and oil trades near its most negative on record.

Given attractive transaction and maintenance costs on forex trades, we believe that the US Dollar/Canadian Dollar pair offers an attractive proxy to trading crude oil itself. Our Senior Technical Strategist expects short-term rallies in oil prices, but the overall trend favors losses and the Canadian Dollar may continue lower against its US namesake.

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

0.40

-0.07

-0.25

-0.28

0.76

0.00

-0.13

1 Month

0.54

-0.07

-0.45

0.14

0.30

0.28

-0.46

3 Month

0.50

0.18

-0.31

0.40

-0.11

0.45

-0.51

1 Year

0.20

0.16

-0.20

0.23

-0.15

0.24

-0.28

USO

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.22

0.74

0.67

0.74

-0.98

0.51

-0.36

1 Month

0.30

0.47

0.32

0.71

-0.67

0.64

-0.43

3 Month

0.38

0.40

0.18

0.68

-0.66

0.65

-0.45

1 Year

0.47

0.38

0.01

0.65

-0.63

0.59

-0.53

DIA

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

-0.18

0.34

0.39

0.50

-0.90

0.29

-0.09

1 Month

-0.04

0.28

0.49

0.49

-0.73

0.42

-0.08

3 Month

0.28

0.43

0.38

0.58

-0.75

0.53

-0.31

1 Year

0.64

0.55

-0.06

0.80

-0.82

0.75

-0.69

FTSE100

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.27

0.61

0.25

0.86

-0.87

0.69

-0.58

1 Month

0.10

0.19

0.54

0.43

-0.57

0.40

-0.07

3 Month

0.33

0.34

0.38

0.55

-0.69

0.51

-0.29

1 Year

0.46

0.38

0.01

0.70

-0.67

0.65

-0.56

SLV

EURUSD

GBPUSD

USDJPY

AUDUSD

USDCAD

NZDUSD

USDOLLAR

1 Week

0.32

-0.09

-0.21

-0.28

0.76

-0.10

-0.08

1 Month

0.46

-0.03

-0.46

0.12

0.22

0.27

-0.43

3 Month

0.47

0.27

-0.17

0.52

-0.37

0.56

-0.53

1 Year

0.33

0.26

-0.18

0.39

-0.34

0.38

-0.40

Perfect Positive Correlation:

1.00

Perfect Negative Correlation:

-1.00

Correlation between Canadian Dollar and Crude Oil Prices

forex_correlations_crude_oil_canadian_dollar_trading_body_Picture_1.png, Crude Oil Tumbles Offer Trade Setups in the Canadian Dollar

US Dollar/Canadian Dollar Exchange Rate (lhs)

Inverse of the US Oil Fund (ETF) (rhs)

The Canadian Dollar’s correlation to Crude Oil prices trades near record strength, underlining the Canadian currency’s appeal as a proxy to trading commodity markets. The US Dollar (ticker: USDOLLAR) itself remains quite negatively correlated to Crude Oil and other commodity prices; that correlation is especially strong with the USDCAD exchange rate.

Correlations are no guarantee that the Canadian Dollar will continue to track moves in crude oil prices. Yet we believe that any further sell-offs or even recovery in oil markets will move the Canadian currency in kind. Trading the USDCAD in lieu of crude oil futures or Exchange Traded Funds offers the benefit of being long yield. The three-month London Interbank Offered Rate (LIBOR) in Canada stands at 1.28 percent, while the equivalent US rate is a mere 0.48.

A trader stands to collect up to as much as 0.88 percent in yield going long the Canadian Dollar against its US namesake (short USDCAD). This in our opinion is an attractive alternative to paying carrying costs on long-crude oil positions, and indeed strong correlations suggest that the two may continue to track one another through short-term trading.

--- 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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