The Relationship Between Crude Oil And Cad
Historically speaking, crude oil and the Canadian dollar have had a
very strong relationship, most of the time, the two assets having a
high degree of correlation.
This can be explained by the fact that Canada holds the second
biggest oil reserves in the world after Saudi Arabia. Moreover, a large
amount of these oil reserves are pumped into the United States, making
Canada the biggest energy source for the U.S. economy. Thus, investors
focus on crude oil prices to gauge the Cad’s direction of trading.
The correlation between crude oil and Cad was pretty easy to exploit
in time, but all this came to an end over the last few weeks as crude
oil began to quickly drop while the Canadian dollar declined only a few
basis points throughout the same period. Most likely, this happened
because of two different fundamental drivers: oil dropped as the market
was re-pricing the outlook of the global demand, while Cad traded
mostly range-bound, together with the dollar index and the other major
currencies, as it seems the financial market saw more dollar than it
would ever need (thus the market stayed in risk-aversion mode only for
a short period).
The attached chart shows how the cad and crude oil have behaved over
the last 15 months (from 03.01.2008 to 07.14.2009), while the secondary
chart shows the weekly correlation between the two. The green area
denotes the periods when the implied correlation was between -0.5 and
-1.0, which are the phases when crude oil can be used to forecasts
Cad’s direction. As a note, the extended periods when Crude oil and Cad
had no correlation or moved in the same direction - as the one we have
right now, denoted by the fact that the correlation index swings
between -0.5 and 1.00- happened only when the market reversed the prior
trend.
Written by TheLFB Trade Team, © 2007-2008 LFB Services, LLC. All rights reserved. http://www.TheLFB-Forex.com |