CNBC interviewed Amelia Bourdeau, director of foreign exchange at Westpac Institutional Bank, who believes that Crude prices are set to rise due to Middle East unrest. She wants to trade on higher oil prices using the Canadian dollar. Not only does Canada export oil, she says, “the Can economy is performing quite well and the central bank is not looking to ease.”
There is a degree of truth with what she said, as Canada is the largest exporter of Oil after Middle East and US. Furthermore, Canadian dollar does have some characteristics of Safe Haven when the economy isn’t doing well, and amongst all the major Central Banks, Bank of Canada appears to be the least dovish among them all. However does that mean that CAD is the best currency to trade rising Oil price?
Using price action from 2007 – 2012, we can see the correlation between various currencies and Brent Crude (BCO). USD/CAD does stand out at -0.81, meaning CAD will strengthen against USD when Oil prices rise.
However, there are other standouts. AUD/USD, another popular commodity currency has a correlation of 0.85 while Norwegian Krone (another Oil producing country) and Swedish Krona (by proxy) both have very good correlation to Brent as well.
Let us take a look deeper
1 year rolling Correlation from 2008 – 2012
Of all the currencies, AUD/USD correlation appears to be the most stable, while CAD SEK and NOK’s correlation are susceptible to huge changes within a short time.
Bottomline: Currencies are experiencing the highest volatility in recent years, and this distorts the convention correlation relationships. If you wish to best emulate the results of Crude Oil? Trade Crude Oil instead of using currencies as proxy.