NO…it’s not what you think!

I did get your attention, though!

The particular Lady I am referring to is one in which we ALL have a love/hate relationship with…similar to a real relationship, I suppose.

Her name?

OIL!

I thought I would spend a few Posts on our relationships and correlations with Oil and Gold…the two most related Commodities to our concerns in the Foreign Exchange markets.

The derivatives that most apply here for us are the Canadian Dollar and the Australian Dollar….so today, let’s focus on the USD/CAD and Crude Oil as a relationship.

We all are aware of the deep correlations between these two…Crude Oil and the Canadian Dollar have correlated in the macro-term approximately 81-82% over the last several years.

In fact, many Futures and Commodities Traders will use Crude Oil as a “leading Indicator” in their work with the Canadian Dollar as a Futures Contract…as well as in their OTC Spot work.

(Yes…you guessed it. CVJ’s “rhetorical question”…)

So why shouldn’t we???

“A fine idea!”, I hear many of you say…  

First things First, though…

I would like to focus purely on some introductory basics of Crude Oil today, as it is such a heated topic worldwide. We will continue on with other aspects of this relationship as we progress.

With the U.S. Dollar being the reserve currency for Oil around the world, it would make common sense to us that when Crude rises, the Dollar itself will fall. Conversely, the same is relatively true.

We can see with these two Chart captures, we have a very strong “Inverse”, or opposite, relationship.

(click once for capture)  

Here is a multi-year Overlay Chart of the Loonie and Black Gold that shows this relationship quite well!

Beautiful, isn’t it?…and for me…the real beauty here is despite popular belief and assumption…these two are NOT one in the same!

Simply look at the Price action here. We are not correlating 100% of the time.

I have heard in too many cases that trading the Canadian Dollar…is actually trading Oil.

I have heard in too many cases…”Let’s have a look at Crude Oil”… in direct reference to a USD/CAD Chart.

Again… NOT the same thing!

Crude Oil only has about 18-22% of the overall “Basket” of criteria and value that goes into USD/CAD’s exchange rate.

Does not the vast country of Canada do other things?…or does all of it’s inherent value in its’ currency come from a singular source…Oil.

Of course not!

This is my “built-in” Lesson for today.

Whenever you are looking at a Derivative…whether it be a Currency pair, a Commodity, a Bond, an Index, and so on…

Be sure to see the Instrument on it’s own merit. Learn about all of the factors and criteria involved that make up the elements of the Instrument.

P.S. - Tomorrow, we will look at some Crude Oil Technical analysis, and discuss some of the Fundamental heated ”flashpoints” surrounding our beloved Black Gold.

We’ve seen about a 6.6% decline from just a week ago, and testing the massive $50 area this week looks highly probable.

Love her or hate her…She will not be Ignored!

Sort of like that person sitting next to you at the breakfast table every morning!…hee hee hee…