A savvy futures trader’s take on the markets
Oil and the Dollar By Pete Mulmat
rude oil and the U.S. dollar have a marriage made in a therapist’s office. Sometimes there’s frustration, sometimes there’s tension—but they are forever tied to each other. As if to celebrate this union, crude oil and the dollar are doing something they’ve only done 11 times in the past 35 years. They’re moving in the same direction. Traders often ask if the value of the dollar relative to other key global currencies works as a major factor in driving oil prices. Well, when filling up a car’s gas tank, Americans pay with dollars, not with euros or Japanese yen. So, why would a relationship exist between currencies and crude? Typically, the price of oil is inversely related to the price of the U.S. dollar. What’s more, barrels of oil are priced in U.S. dollars across the world. The easiest way to think about this is from a non-U.S. oil producer’s point of view. In Saudi Arabia, for example, an oil producer needs riyals to spend but has to sell oil in dollars. When the dollar’s strong, he can sell oil at a lower price and convert fewer but stronger dollars into riyals. When the dollar’s weak, he needs to sell oil at a higher price to convert a larger quantity of weaker
Crude and the euro When the dollar rises, the euro falls, and vice versa.
dollars into the riyals. Because all currencies are interrelated, this activity trickles through to other currencies—like the yen and euro, for example. This works for oil buyers, too. Because crude is a global commodity priced in U.S. dollars, it’s logical to think that when the value of the dollar declines, buyers would need more dollars to purchase the same 42-gallon barrel
of oil. In other words, the dollar and crude oil should be inversely correlated, moving in opposite directions. But now, that relationship is flipped on its head. Oil prices and the U.S. dollar are rallying in tandem—a correlated movement that has occurred only 11 times since 1983. Crude (/CL) was up 12% in March 2019 (see “Crude and the euro,” above), (Continued on p. 56)
Crude and U.S. dollar correlation Historically, crude oil has had a -0.25 correlation to the dollar, or about a +0.25 correlation to the euro (left chart). With a looser correlation of just -0.25, however, the market goes through these periods of divergence, but always seems to revert back to normality (right chart).
june 2019 | luckbox
5/2/19 12:55 PM
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