The price of oil effects almost everyone to an extent as it is so widely used. As I am sure you are aware the price of oil has fluctuated massively in the past which has in turn affected the price of many goods and services we purchase in our daily lives such as petrol, diesel, energy, food etc. Oil has been extremely volatile in recent years, some of the major factors that affect the price include:
* Anything that may threaten Supply (e.g. labour strikes)
* Geopolitical tensions, especially in the Middle East
* The weather – as this affects demand
* Natural disasters – remember what happened to oil during hurricane Katrina?
If we take a look at the currencies of countries who import the vast majority of their oil against the countries who export vast majority of their oil, it certainly shows an interesting scenario.
Little is it known that Canada one of the biggest oil exporters in the world and has the biggest oil reserves. The USA import around 99% of their oil so let’s take a look at CAD/USD .
We can see historically the price of oil in the medium-long has been largely correlated with the currency pair CAD/USD (this is just the inverse of USD/CAD). On many occasions oil has been a leading indicator for USD/CAD. If one wanted to speculate that oil prices are going to move to $100 in the next year, going short on USD/CAD (or long on CAD/USD) may be one way of doing it.
An alternative trade with similar levels of correlation is CAD/JPY. Japan also import almost all of their oil.
The advantage of trading this pair is the interest rate differentials between CAD and JPY. For every day you rolled over you would earn the swap due to the differentials. Currently Japan has 0.5% and Canada 4.5% central bank rates. A major disadvantage to this pair is that it is effectively a Yen Carry trade and if the carry trade collapses like it has done historically it would probably drag CAD/JPY down with it.
