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Have oil prices bottomed out? After the dramatic fall from the $78.40 peak in July, crude prices seem to have settled in the low $60s. But there are a few things happening - or not happening - that could knock the props out from under that price table. For one thing, geopolitical tensions, especially in the Far East, have eased. China has been busy discovering more of its own oil and gas fields. And the speculative boom that pushed oil prices so high in the summer has evaporated. After lost $6 billion on its bad energy bets, regulators around the world have been cracking down on hedge funds, and the funds are dumping their long oil positions as they try to salvage their financial statements. Even investors have become increasingly concerned, as the price has flirted with the psychologically important $50 price in recent months. Should oil prices crash, the effect will ripple through most of the world's economies. The Middle East, of course, will attract most of the publicity. But for currency traders the focus should be on Canada. That country's economic boom has been fueled by the climb in oil prices, which sent the Canadian dollar to 28-year highs against the USD. If oil prices fall, the Canadian economy would suffer a serious setback. In an extreme case, the Bank of Canada would be forced to lower its interest rates, which would damage the Canadian dollar significantly. As the world's second largest holder of oil reserves (and the biggest single crude exporter to the U.S.) Canada -- and its currency -- have everything to lose in an oil price crash. And the US and the US dollar have everything to gain. The lower the oil price, the better it is for the US economy: more discretionary income fattens American consumer spending, and fears of an economic slowdown recede while the dollar gains.
USD/CAD: Nearly Perfect
Therefore, the USD/CAD is the ideal trade to take advantage of falling oil prices. The chart says it all: when oil prices rise, USD/CAD falls - and vice versa. Since the beginning of 2004, the correlation between the product price and the currency price has been an incredible near-lockstep 90%! For the time being, the differential between the rates in the US and Canada is 100 basis points, which means that for each day a trader holds one regular lot of USD/CAD on the long side, the trader would earn $2.80 in interest income, a benefit that short oil contracts do not offer. Furthermore, USD/CAD is still trading near 15-year lows. It was only four years ago that the dollar was trading at 1.60 against the loonie and we are already seeing signs that the sell off may be nearing an end. *DISCLAIMER: Any opinions, news, research, analyses, prices, or other information contained on this website is provided as general market commentary and does not constitute investment advice. Forex Capital Markets Ltd. will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.... [download for more]
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