Over last couple of years there was a lot of discussion in Forex trading circles about Canadian dollar and oil prices. Why? Canada is major producer of oil and with surging oil prices people have been trying to find a correlation and take advantage of it. Or at least explain it.
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 prices around 80 US dollars per barrel, production can go on in earnest. We are talking about estimated 300bln barrels reserves. That's 10 times total annual worldwide output. Huge deposits.
This fact has been known for years. 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 rising oil prices. In theory it makes sense. Japan is an importer and Canada an exporter of oil. It should work, right?
Unfortunately, it only works on the broadest of scales. 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 most 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.
Oil prices are just one of many factors influencing CAD. 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.
Should one really incorporate oil price analysis into Forex trading, there is a better alternative to CAD/JPY. What is it? USD/CAD. That's right. 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 soon see just how useful is oil price analysis when applied to Forex, or more precisely, CAD. Next few weeks can give us that answer. So keep an eye on both and decide for yourself- can one be helpful in trading the other.
Mike P. Kulej is a Chief Forex Strategist for Spectrum Forex LLC. He specializes in mechanical trading systems as explained on http://www.spectrumforex.com Spectrum Forex LLC offers numerous services to individual traders. With questions and comments e-mail him at kulej@spectrumforex.com.
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