This segment examines the correlation between Canadian Dollar futures and Crude Oil futures and includes two trade ideas one of which uses options. Pete Mulmat shares some of his wealth of knowledge of the futures markets in this interesting show.
A graph was displayed of the price of Crude Oil (/CL) versus the Canadian Dollar (/6C) from October 2010 to present. Pete pointed out the decline over the last 12 months or so in both the Canadian Dollar and Crude Oil. The C$ declined by about 12% and Crude by about 48%.
The correlation is not something new. Analyzing the last 10 years reveals a correlation of almost 0.8 (in which 1 would be perfect). A table was displayed of the correlation of daily returns of Crude Oil (/CL) versus the Canadian Dollar (/6C). The table showed the 1 month, 3 month and 6 month correlations.
Pete explains the fundamentals of the correlation and how a huge amount of Canada’s FX earnings come from crude exports. This has increased as Canada has developed the Alberta oil sands and increased crude exports (mainly to the US). Since Crude is priced in terms of US dollars by most users, hedgers and traders it's not surprising that US dollars are the preferred currency for most energy-based transactions between Canada and the rest of the world. Additionally, that the US imports almost all of Canada’s crude exports results in a significant impact on the flow of US dollars into the Canadian economy.
Pete elaborated on the fundamental economic effects. He then proposed his trade idea. A breakdown of his possible trade was displayed. The breakdown included buy/sell, contract, price, implied volatility (IV), number of contracts, total notional value, initial margin per contract and total margin. A variation using options was also displayed.
Watch this segment of “Closing the Gap-Futures Edition” with Tom Sosnoff, Tony Battista and Pete Mulmat to learn Pete’s trade idea and to learn more about the correlation of Crude Oil to the Canadian Dollar and how to trade it.
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