USDCAD correlation with crude oil
Crude oil prices are highly correlated to the Canadian dollar. The higher the price of Crude Oil, the stronger the Canadian dollar and the lower the USDCAD price. There is no downloadable indicator for this, but this correlation relationship between is still highly usefuly for your trading of the USDCAD.
Why?
- Crude Oil is a key export of the Canadian economy and higher crude oil prices are a benefit to its economy as well as the Canadian dollar
- Oil is priced is USD. Hence the weaker the USD, the higher the price of oil and the stronger the CAD vs USD, and therefore the lower the USDCAD price.
Example
The red line is the price of Crude Oil and the candlestick chart is the price of CADUSD. Timeframe per candle is 1 month.
Since 1998, you can see Crude Oil prices correlate very well with CAD strength.
How do I use it?
If you believe that Oil prices are likely to trend higher in the medium term (6 months to a year), it is likely the Canadian dollar will strengthen against the US dollar. In other words, short USDCAD.
Conversely, if oil prices are likely to trend lower, perhaps due to OPEC+ oversupply or poor economic growth, then you should long USDCAD.
Quantitative Example
This is a regression of weekly front month crude oil futures prices against USDCAD prices. You can see there is a strong negative correlation of 0.8179 between Oil and USDCAD prices.
Download it (excel file of regression analysis):
That’s it! I hope this indicator helps you on your way to profitability!