Over the last nine sessions NYMEX crude oil has rallied by $8.11 a barrel or 10.9%. In fact, last night the greenback hit its lowest low against a basket of major currencies (DXY) since January. What does this mean for ’s newly acquired bearish bias in the NYMEX liquids.
The nearby (30-day) correlation co-efficient between crude oil and the dollar index has strengthened from - 0.428 to -0.802, which means that 80.2% of crude oil’s rise can be explained by the weakness in the dollar. As such, commodity currencies are on a tear. The Canadian loonie hit a two-month high, 98.43 U.S. cents, the Aussie dollar hit a two-year high of 97.97, and the New Zealand kiwi hit an eleven-month high of 74.93.
Oil is a dollar denominated asset, as goes the dollar so goes oil, in the opposite direction, i.e. there is usually a negative correlation between the two. For example, over the last five years the relationship between the USD/EUR and crude oil was positively correlated just 12% of the time.
This positive relationship averaged 0.276 with a high of 0.631 and an average length of 19 days. On the other hand, the inverse relationship averaged -0.623 with a high of -0.971 (nearly perfect negative correlation) and an average length of 130 days.
Thus, once negative correlation has been established it lingers. In between March 2009 and January 2010 (210 trading days) the relationship averaged -0.629. The dollar fell 15% (peak to trough) against the euro while crude oil for February 2010 delivery rallied from a low of 56.98 to a high of 83.95 (+47%).
Currently, correlation has been negative since May 10th (104 trading days). Since then the dollar has dropped 14%, from a high of €0.839 to €0.723 as of last night. The corresponding rally in crude oil has not occurred without its hiccups. Spot crude oil on the NYMEX for November delivery bottomed at 72.42 on May 25th, peaked at 83.46 on August 04th, double-bottomed at 72.36 on August 24th and close last night at 82.82. Therefore, crude oil is up 14½% peak-to-trough.
Best case scenario, we double-top (à la the May 25th/August 04th double-bottom). Otherwise, here at we might be altering our view sooner than planned. To wit, on May 13th the November market bottomed at 84.05, the next day it topped out at 83.87. Thus, the bulls just might be gunning for this gap.
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Stephen Schork is the Editor of and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.