How to Use Currencies to Trade Commodities

Monday, 21 Mar 2011 | 10:22 AM ET
The Syncrude oil sands extraction facility near the town of Fort McMurray in Alberta Province, Canada.
Mark Ralston | AFP | Getty Images
The Syncrude oil sands extraction facility near the town of Fort McMurray in Alberta Province, Canada.

The past week saw lots of currency-market action, but commodities went on a ride as well. From "Money In Motion", tips on using currencies to trade commodities - especially oil.

Rebecca Patterson, global head of currencies and commodities for J.P.Morgan's private bank, is a fan of using currencies to trade commodities, since the currency markets tend to be more liquid with better bid-ask spreads. And for oil, the commodity of the hour, one of the best proxies is Canada, Patterson says.

Patterson is bullish on oil, arguing that even if the Middle East calms down, that will boost economic growth, which will eventually spur demand for oil. And of course, if the turmoil continues, that should push oil prices higher as well. Since Canada is the world's sixth largest oil exporter, Patterson is bullish on the Canadian dollar.

Money Match Up
Currency flash crash? What was really behind the unprecedented move in the yen. Will the G-7 actually prevent a currency crisis? And how to profit in commodities using currencies, with CNBC's Melissa Lee and the Money In Motion traders.

The trade Patterson recommended is straightforward.

Wait until after Tuesday, when Canada will discuss its budget.

Then, with that event risk out of the way, sell the U.S. dollar and buy the Canadian dollar around 0.99 with a target of 0.95 and a stop loss around 1.0150.

Todd Gordon, co-head of research and trading for Aspen Trading Group, agreed that the trade looks promising, but warned that the Canadian dollar is highly correlated with the S&P 500. "You're essentially betting on a higher stock market," he warned.

But Patterson was not concerned. She anticipates U.S. stocks moving higher as the economy recovers, and since Canada does so much trade with the U.S., that should help the Canadian dollar as well, she said.

Tune In: CNBC's "Money in Motion Currency Trading" airs on Fridays at 5:30 pm.

"Money in Motion Currency Trading" repeats on Saturdays at 7pm.