Another Way to Play Oil
Forex traders need to have their ears to the ground to trade profitably. That means being aware of how different asset markets interact with each other. Stock markets are big drivers of all markets, as are commodity markets. Meanwhile, fundamental news flow and the actions of central banks can be catalysts for big market moves.
Because of this, forex traders often come up with trading ideas for other markets. The problem is that those markets are not always offered by a broker that concentrates on forex. Fortunately, there are ways to profit from the moves of other markets directly through forex.
For example, if you believe crude oil is about to go up, you can play the trade by going long on the Canadian dollar.
When most people think of oil producing nations their thoughts typically go straight to countries in the Middle East. Canada, though, is one of the top oil producing nations in the world and its economy is heavily tied to the energy industry. What that means is that when the price of oil rises, the Canadian economy profits and this will usually result in an appreciation, or greater demand for, the Canadian dollar.
Furthermore, although Canada has smaller overall reserves than some big oil producers like Saudi Arabia, Canada is still the biggest exporter of oil to the United States. This is largely a result of its close proximity but it’s also because Canada is a much more stable oil exporter than the others.
The correlation between the price of oil and CAD means that forex traders who want to profit from a rise in oil can bet on CAD. Also, since oil is extremely volatile, CAD offers a much safer way to go about it.
Betting on USDCAD is an even better option since oil and the US dollar are negatively correlated. Oil is priced in US dollars which means if one goes down the other goes up and this can occur for a number of reasons.
Why oil can surge
For one, the price of oil can go up as a result of a decrease in supply or an increase in demand. With booming populations the demand for oil goes up. Moreover, total global supplies of oil are known to be dwindling.
Second, disruptions to supply such as war in the Middle East can spark rapid price increases in oil.
Why the US dollar can drop
The US dollar can drop as a result of money printing by the Federal Reserve. The expectation of high inflation can cause the value of the greenback to depreciate. A deteriorating current account balance could also cause traders to sell the dollar.
When these conditions all line up together, you have the perfect conditions for a surge in oil and for forex traders, the best way to play this is by selling USDCAD.