Canadian Dollar and Crude Oil

Introduction

In this post, we dive into the powerful correlation between crude oil and certain currencies, specifically focusing on the Canadian dollar (CAD) and Japanese yen (JPY). While many traders look at the relationship between crude oil and CAD, it’s important to understand how these relationships have evolved over time, especially considering changes in global oil production. We’ll explore how you can use crude oil prices to influence your trading strategy, particularly with the CAD/JPY pair.

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Crude Oil and Currency Correlations

Crude oil has a well-established correlation with currencies, especially the Canadian dollar (CAD) and the Norwegian krone (NOK). However, with shifts in global oil production, particularly the growing influence of the United States, the relationship between oil and CAD has evolved. In this section, we’ll break down how these correlations work and why they still matter in today’s market.

Why CAD/JPY is the Ideal Oil Trade Pair

While many traders look at USD/CAD as the go-to pair for trading oil, the CAD/JPY pair offers a better reflection of crude oil’s price movements. Japan imports 100% of its oil, making the Japanese yen highly sensitive to oil prices. On the other hand, Canada is a major oil exporter. Together, these dynamics create a reliable pair to trade based on oil prices, especially since Canada often has higher interest rates than Japan.

Historical Examples of Oil-CAD/JPY Correlations

To see this correlation in action, we can look at historical data. For example, in April 2020, crude oil hit a low of around $16 per barrel, and the CAD/JPY pair mirrored this, reaching a bottom at the same time. Similarly, when crude oil formed a double top in May 2022, CAD/JPY also showed a similar movement. These examples highlight how well crude oil and CAD/JPY are connected.

USD/CAD and Its Changing Relationship with Oil

The USD/CAD pair used to be a popular choice for trading oil, but that relationship has weakened over time. With the US becoming one of the largest oil producers, the crude oil-CAD correlation has become less predictable when paired with the US dollar. While there are still occasional overlaps, USD/CAD doesn’t offer the same clear link as CAD/JPY.

Exploring Other Correlations: NOK/JPY

The Norwegian krone (NOK), another oil-linked currency, also has a correlation with oil prices. You can trade NOK/JPY based on oil movements, though the correlation isn’t as strong as CAD/JPY. Still, it provides another option for traders looking to diversify their oil-based strategies.

Using Charting Platforms to Track These Trends

Platforms like TradingView allow traders to visualize these correlations easily. For example, typing in CXY will show the Canadian dollar index, which behaves similarly to crude oil. By tracking crude oil prices alongside currency pairs like CAD/JPY, traders can get a better sense of where the market is headed and plan their trades accordingly.

Final Thoughts on Trading CAD/JPY in Oil Markets

Overall, CAD/JPY remains the most reliable pair when trading based on crude oil movements. Canada’s position as a major oil exporter and Japan’s dependence on oil imports create a solid foundation for this correlation. Once you grasp the fundamentals of the oil market, you can refine your technical setups to time trades more effectively. Whether you use chart patterns or Fibonacci retracements, it’s crucial to understand the reasoning behind the trade.