Crude Oil and Forex Market Correlation (USDCAD, CADJPY, USDRUB, USDNOK)
One of the most important Forex and commodity correlations exist between USDCAD and Crude Oil.
The correlation between the Canadian dollar vs US dollar and the oil price is very high. Historically, there is a 0.75-0.80 positive correlation between CADUSD and oil prices.
■ CADUSD and Oil Price 0.75-0.80 positive correlation
■ CADJPY and Oil Price 0.80 positive correlation
There are also other Crude Oil and Forex correlations including USDRUB (USD vs Russian Ruble), USDNOK (USD vs Norwegian Krone), and CADJPY (Candian Dollar vs Japanese Yen).
Explaining the Negative Correlation between USD and Crude Oil
All commodities are priced in US Dollars, and consequently, there is a negative correlation between the US Dollar and Commodity Prices.
This is a simple example, explaining why.
If the Demand and the Supply for a particular commodity are stable (for example Crude) and the US Dollar appreciates 10%, then the price of this commodity appreciates also 10%. But as there is no additional demand to support this new price level the price of the commodity falls to find a new equilibrium between demand and supply. That means the commodity prices move always in the opposite direction to the US Dollar.
Crude Oil and the USDCAD Correlation
As it was explained before, Crude Oil is negatively correlated to the US Dollar. Actually, Crude Oil is negatively correlated to USDCAD and positively correlated to CADUSD.
On the other hand, a large part of Canada’s exports to the US derives from the sale of Crude Oil. That means that if the price of Crude increases the value of Canada's exports to the US increases too. Canada exports about 2 million barrels of oil to the US every single day. Also, 85% of all Canada's exports are going to the US.
In other words, both sides of the USDCAD pair either affect or get affected by the Crude Oil.
Trading CADJPY (Candian Dollar vs the Japanese Yen)
Another interesting commodity correlation exists between Crude Oil and CADJPY. Japan's economy is highly dependent on oil. Actually, Japan is the world's third-largest oil importer.
If the oil price moves considerably higher, then more Japanese Yen must be sold in order for Canadian Dollars to be bought. Therefore, each time Crude Oil price increases, CAD/JPY increases too. There is about a 0.8 positive correlation between Crude Oil and CADJPY.
Why Trading USDCAD and CADJPY instead of Buying Directly Crude Oil
There is a good reason for trading USDCAD Correlation instead of buying directly Crude Oil, and that reason is called interest rates.
The Canadian Dollar against the US Dollar carries a positive overnight rate (swap). That means that if you go long on the Canadian Dollar you can earn an additional interest rate. On the other hand, if you trade directly Crude Oil you will have to pay an overnight rate (negative swap value). When you stay in the market for long periods this interest-rate difference can prove significant.
□ Going Long on CADJPY and Short on USDCAD is better than buying directly Crude Oil
■ Crude Oil and Forex Correlation