How to trade Oil using Foreign Exchange


 

When many people think of trading oil, they immediately think that the only way to trade it is via a futures contract.  However, although Futures may be the most direct way to trade oil, if one doesn’t have access to a futures exchange, there are foreign exchange proxies that can be used for oil. The most popular currency that trades in concert with oil is the Canadian Dollar. Canada is a net exporter of oil, which makes up a large part of their economy.  Therefore, the value of the Canadian Dollar is often affected by the price of Crude Oil.  Traders can look for a strong inverse relationship between Crude Oil and USD/CAD (or many of the other Canadian pairs).

 

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A correlation coefficient of +1.00 indicates a perfect positive correlation between 2 assets and that they will move together 100% of the time.  A correlation coefficient of -1.00 indicates a perfect negative correlation between 2 assets and that they will move in opposite directions 100% of the time.  A correlation of 0.00 means that there is no correlation between 2 assets.  Correlation coefficients above +0.80 or -0.80 are considered strong correlations.  Note that correlation only gives the strength in relationship of the direction of the move, not the magnitude.

Guide to the Canadian Dollar

The current correlation coefficient on a daily timeframe between the front month WTI Crude Futures contract and USD/CAD IS -0.97! This is very close to a perfect negative correlation.  Therefore, the price of Crude oil and USD/CAD move in opposite directions most of the time.  As a result, USD/CAD can be used as a substitute for Crude Oil for fx traders who don’t have access to the futures market. (Remember, the correlation is negative, so the 2 assets move in opposite directions!) This correlation example is on a daily timeframe and could be (and probably is) different on other timeframes.

usdcad daily ci

Source: Tradingview, Stone X

Find out what factors influence the price of crude oil

Norway is in a similar situation as Canada as far as its dependence of oil on its economy.  Therefore, the price of Crude Oil also affects the value of the Norwegian krone.  The currently correlation coefficient between Crude Oil and USD/CAD is -0.95!  This is also a very strong negative correlation coefficient.  Therefore, longer-term traders who use daily timeframe charts can also use USD/NOK as a substitute for Crude Oil.

usdnok daily ci

Source: Tradingview, Stone X

 

 

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On a daily timeframe, WTI Crude Oil has been ripping higher since putting in a near-term low on August 23rd near 61.76.  On October 25th, oil price formed a shooting star candlestick on at upward sloping trendline resistance, which dates to March 8th.  A shooting star is indicative of a reversal pattern.  Also notice that the RSI is in overbought territory, another indication that the rally may be ready to pull back.  Support is at the lows from October 20th at 80.81,  then way down at previous highs from July 6th at 76.88.  Near term resistance is at the highs of the shooting star candlestick on October 25th at 85.39, then the 161.8% Fibonacci extension from the highs of July 6th to the lows of August 23rd at 86.27.

usoil daily ci

Source: Tradingview, Stone X

Crude Oil has been on a one-way street higher since mid-August.  USD/CAD and USD/NOK both have a high negative correlation with oil.  Therefore, if Crude oil continues to move higher, fx traders who do not have access to futures markets can use USD/CAD and USD/NOK as a substitute on a daily timeframe.

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