Crude Oil And The Canadian Dollar – A Time-Tested Correlation With Plenty Of Opportunity?

Photo by Timothy Newman on Unsplash

This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investing advice.

In random environments, the likelihood of correctly observing patterns and relationships is greatly diminished. 

This is an idea that can sometimes go unnoticed by new traders. Using insufficient anecdotal evidence to create a strategy that does not have a statistically significant edge, people can end up in a cycle of pain. They execute with discipline, study countless hours and journal entries only to find they’re still unprofitable.

In his book “Thinking Fast and Slow,” Daniel Kahneman describes how human minds have a natural tendency to create causal stories even when there are none. He adds that the “lazy” part of our minds is poor at computing statistics, which is a crucial component to recognizing profitable strategies. Given these difficulties, it’s no wonder that profitability remains elusive for many market participants.

However, traders might be able to address this limitation in their thinking. Backtesting and learning statistically significant patterns and relationships can help traders break out of this cycle of pain in some situations. While nothing is ever guaranteed, and market risk can involve unique or unpredictable occurrences, there are ways to look closer. In the currency market, there are a few relationships between commodities and currencies that have stood the Stock-Market "Patterns" and Financial Analysis: Methodological Suggestions test of time and led to somewhat predictable movements. 

In a succinct article, FOREX.com, a leading foreign exchange (forex) broker in the U.S., outlines these relationships and how they relate to one another. 

Please be aware that past performance is not indicative of future results.

For Canadians, one particular relationship stands out: the USD/CAD pair and West Texas Intermediate Crude Oil (US Oil). 

Commodity Correlations: USD/CAD And Crude Oil

West Texas Intermediate, or WTI, is the main type of oil traded in North America and is influential to the Canadian economy. It’s no secret that the U.S. is the world’s foremost consumer of oil. At nearly 19 million barrels per day (BPD), it’s well ahead of second-place China, which uses 11 million BPD. But many people don’t realize how they get that oil, FOREX.com says in its article. 

Many make the false assumption that Saudi Arabia is the nation that North America relies on for a majority of its oil imports, but a third of oil imports come from Canada, with Saudi Arabia contributing just over 17%. 

Of the 19 million BPD the U.S. consumes, 10 million BPD are produced in-house, but because Canada exports so much oil to its larger neighbors to the south, its currency is intrinsically tied to the value of the black gold. 

Usually, when the price of WTI increases, the price of the USD/CAD pair rises and vice versa. 

Contracts for Difference (CFDs) are not available to US residents.

More Commodity Correlations: 

AUD/USD and Silver

The prevailing thought around trading circles is that gold and the Australian dollar/U.S. dollar (AUD/USD) is the correlation to follow, but silver actually can be more reliable. It’s no secret that Australia has a significant portion of its economy tied to mining, but most don’t realize the scale. More than 2% of the country’s workforce is employed by the industry, and over 5% of the gross domestic product (GDP) relies on it. Mining also accounts for about 35% of the nation’s exports. The fluctuations of the metal market have a large impact on the outlook for the AUD, according to the FOREX.com article. 

USD/NOK and Brent Crude Oil

UK Oil, or Brent crude, is the version of oil that is extracted from the North Sea and is mostly traded in Europe. A variety of nations have access to the oil in the North Sea, but it is estimated that the Norwegian section contains about 54% of the sea’s oil reserves and is highly influenced by the price. On the world stage, Norway is the fifth-largest oil exporter and third-largest gas exporter with those industries comprising more than 20% of Norway’s GDP, the article states. 

Taking Advantage Of These Established Relationships?

Given the heightened rise of geopolitical developments, speculating on currencies and their commodities brings with it a heightened amount of risk. The offset is that there can be a heightened amount of reward in there, too. Armed with a strong understanding of the relationship between commodities, traders may be one step closer to potentially finding trading opportunities in the midst of all the chaos.

FOREX.com states that its goal is to provide these traders with direct access to these opportunities. Canadian traders can now also engage directly with the USD/CAD pair and other currencies through the FOREX.com platform. 

Click here to find out more. 

This post contains sponsored advertising content. This content is for informational purposes only and is not intended to be investing advice.

Please note that foreign exchange and other leveraged trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved, seeking independent advice if necessary.