The dollar and WTI inversely related… really?
Yesterday (Thursday), WTI prices fell 2.13% while the US dollar strengthened 1.13% against the euro. On cue, analysts and talking heads began to raise the WTI/USD inverse correlation argument to explain the price movements. Not so fast.
We do not disagree with the fundamental assertion that a higher dollar translates to lower nominal prices for crude oil, a dollar denominated commodity. In fact, we have often written about the correlation in The Schork Reportwhen it is part of an identifiable trend.
In today’s issue, we chart WTI against USDEUR. From August 24th to November 11th, the USDEUR rate dropped 7.77%, over the same period WTI gained 18.89%, a steady inverse relationship over the space of three months. On the other hand, since November 11th, the USDEUR rate has strengthened 5.11% while WTI has been flat, from 88.69 on November 11th to 88.38 as of yesterday, a 0.35% decline.
In quantitative terms, we have seen the correlation coefficient weaken from a strong -0.7055 on November 10th to just -0.408 as of writing. The two series may begin moving in opposite directions again, but right now it is simply too soon to call. We caution trading the two securities against each other until a trend has been established.
In the meantime, WTI seems to be following technical signals. In the Trading the Technicals section of December 14’s edition of The Schork Report, we wrote that Bloomberg’s Trendstall indicator had registered a stall in upward trend on December 8th, when prices were trading at 88.28. Since then, prices have spiked higher, but yesterday’s close was 88.38 — eerily similar to the date when trend stalled.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.