Canadian Dollar (CAD) and Oil

Oil is the life blood of the industrialized world and thus a highly watched and traded commodity. While oil is often nicknamed "Black Gold", we prefer to call it "Black Crack".

Many countries that produce "black crack" and hold massive reserves of "black crack" tend to benefit from rises in oil prices, including Canada. We like to call these countries the Black Crack Mafia.

Canada is one of the world's largest producers of oil (black crack dealers) and holds oil reserves (black crack stash) second only to Saudi Arabia, which makes Canada very reliant on its most prized commodity. It is also the largest supplier to the world's biggest oil consumer (black crack addict) - the United States. Because oil is such a big part of the US economy, rising oil prices tend to have a negative affect on U.S. equities and the U.S. Dollar.

Wait a minute! Rising oil prices tend to be good for Canada/bad for the U.S., while falling oil prices tend to be bad for Canada/good for the U.S. - how can we play this idea in the Forex markets? Anyone? USD/CAD??? Right! In fact let's take a quick look at a chart overlaying oil prices and the USD/CAD:

As you can see from the chart above, price movements USD/CAD and Oil are inversely correlated from each other - meaning as oil trends higher, USD/CAD tends to trend lower and vice versa.

Since January 1988, USD/CAD and Oil have had about a 68% inverse correlation to each other. This is a pretty strong correlation. As a currency trader, knowing this can add another tool to your toolbox when analyzing USD/CAD and help you make longer term trading decisions.