Sunday, January 11, 2009

Forex Trading Oil prices and Canadian dollar

Canada doesn't rank at the top of oil producing countries. Many others are bigger. Saudi Arabia, Russia, Kuwait and others. Nonetheless, Canada has been an exporter of crude for a long time and being a neighbor of USA, the biggest oil consumer, raises Canada's stature in the field of this important commodity. There are huge oil reserves locked in the “black sands” of Alberta.

Until recently exploitation of these deposits has not been economically viable. Now, however, with oil embargoed press release around 80 US dollars per barrel, production can go on in earnest. Conventional wisdom among Forex traders was that it could be used in their decision making process. Only how? Conventional wisdom has been to go long CAD/JPY if one anticipated media releases oil prices.

In theory it makes sense. Japan is an importer and Canada an exporter of oil. It should work, right?

If one has an outlook for many months or even years to come, this particular notion might make sense. Not on any shorter time scale, though. Recent developments are perfect example. Oil has just reached an all time high of 80 dollars while CAD/JPY is still about 700 pips from writing press release recent high. Besides, despite much research and many tries, nobody has demonstrated that either one of these financial instrument is a leading indicator for another. So there is no clear way to take advantage of this correlation on regular bases. There are prices of many other commodities , like metals and agricultural products. There is the government spending, unemployment, taxes and interest rates.

Entire spectrum of factors. Besides, there are better ways to play oil market. Futures and stocks of oil producers can deliver better returns if one is correct on crude price direction.
United States is a consumer of virtually all of Canadian oil surplus. These two countries are their respective biggest trade partners.

What's more important, price of oil is better correlated to USD/CAD than any other liquid currency pair. USD/CAD followed crude prices to levels no seen in 30 years. We are sitting at 1.0300 as of of this writing, just a step away from parity. With oil hitting all time high and USD/CAD on a threshold of this critical level, we will press realease see just how useful is oil price analysis when applied to Forex, or more precisely, CAD. Next few weeks can give us that answer.

1 comment:

Bhoomi Desai said...

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