We realize that after all these years looking at the market, our approach to currencies and global macro has remained quite simple and cyclical. We usually start our day by looking at the USDJPY (and AUDJPY), USDCNH and CSI 300 index charts that [kind of] describe us the overnight session. If we see huge moves in those charts, we know something important has happened in the ‘Est’ during the night that must be read and understood.
Since the beginning of this commodity meltdown (that analysts named ‘The End of the Super-Cycle’), each [bad] news coming from giant China usually had an impact on commodity prices, bringing down commodity currencies and especially the dollar-bloc ones (CAD, AUD and NZD). In today’s article, we focus on the Canadian Dollar (CAD or Loonie) and how it has reacted to the Oil prices decline over the past year. Since the beginning of 2014, USDCAD (orange line) has appreciated by 33% as the Canadian dollar has been dramatically impacted by the falling prices of oil (WTI, white line) now trading at $32.80 per bbl.
However, as you can see it on the chart below, even though the two underlying assets have been moving ‘together’ [most of the time] over the past year (i.e. lower oil prices implies CAD depreciation versus the US Dollar), the correlation can change over time. For instance, the 5-day correlation between USD and WTI stands now at -90.18%, but have also higher and even positive during small periods of time (mid-January or early December last year).
The reason why we like to watch correlation between assets classes is for the risk management and FX and commodity positioning. We have to admit that since the Fed started to consider shifting towards a tightening monetary policy cycle (i.e. raising interest rates), correlations have been much stronger and being diversified (i.e. not too much exposure to the US Dollar) can be difficult sometimes.