The Currencies that Will Rise and Plummet As Oil Soars

(Two FX Trades to Play Oil’s Rise)

Get set for the next great oil bull market dear reader.

Last month, we saw oil overcome the key technical and psychological barrier of $75 a barrel that it struggled with for so long.

This week, oil spiked up to $80 a barrel.

Since it’s broken out of this long base that it’s built for the last four months, it’s very likely that oil will climb higher for some time to come.

In fact, my colleague Ashish Advani just called for oil to spike up to $130 a barrel in 2010 in the most recent issue of Currency Capitalist.

Naturally, as an FX guy, I want to look at how to play oil’s rise in the FX market. Now there are two key ways to do just that. Let’s start with the “traditional” pair…

The Traditional Oil-Loving Pair

As you may know, there’s one pair that every trader thinks of when they hear oil is about to rise. That’s the USD/CAD. Check it out below…

Oil’s Rise Pumps Up the CAD and Pushes Down the Dollar

Oil is a double-edged sword when it comes to this pair.

You see, oil is priced in dollars. So as oil rises in price it naturally takes more dollars to buy it. In other words, high-priced oil weakens the dollar’s “purchasing power.” This is why, when commodities like oil begin to rise, it acts like a weight on the U.S. dollar.

Oil’s Rise Causes a Huge “Wealth Transfer” into Canada!

With that said, Canada’s dollar loves high-priced oil. Why? They are a major oil exporter to the world, while the U.S. is a net importer from the world!

The Canadians pump oil out of the ground for a fixed price, and can now sell it for a much higher price to us hosers here in America!

Since we have to pay a much higher price for the oil, it weighs down our economy. It’s easy to see why. The more money we have to put into our gas tanks (which is a “must,), the less money we have to purchase other things that we want. A “necessity-driven” economy is not a thriving one.

However when Canada receives the payment for that “high priced oil,” they rejoice…and their dollar shows it! Canada’s profits go up as a “wealth transfer” takes place as a heightened pace from the U.S. to Canada.

This “dual effect” works overtime on the USD/CAD pair in bringing it down BOTH on U.S dollar weakness AND Canadian dollar strength. It gives you two great reasons to pile into USD/CAD short orders in other words.

Again, the USD/CAD is a solid way to play the rise of oil. But what if I told you there’s an even better way to play that same oil rise?

The Most Overlooked Currency Pair to Play Oil’s Rise

Those of you who have been reading my comments over the last few days already know that when it comes to trading the world’s most overtraded currency, the U.S. dollar, nothing is quite so simple.

As a quick review, 90% of the world’s trades involve the U.S. dollar. So there are A LOT of traders watching the dollar’s moves on any given day. They’re stalking the news channels – ready and waiting for any news that might affect their dollar trades.

As such, small seemingly even unrelated news items can jerk the dollar’s price. So if you’re trading the dollar, you have to worry about minute news events that can jerk the dollar’s price unexpectedly.

Also, with so many traders buying and selling the buck, the dollar pairs just don’t make the huge moves they once did. They move slowly and don’t give you the same chances to make the huge profits as they did just a handful of years ago.

That’s why it pays to trade non-dollar pairs, or currency crosses. And in “big oil’s” case, the currency cross to play oil’s rise would be the CAD/JPY.

It’s a very similar story to the USD/CAD pair. Once again, Canada is the big oil exporter, so the Canadian dollar should jump up in price right along with oil, and Japan is the net importer of oil. They have to buy the majority of their oil, so any jump in oil’s price has a negative affect on their economy and currency.

But this time you’re trading the Canadian dollar against a less traded, and a bit more volatile currency, the Japanese yen. Take a look below at how this currency pair performed compared to the traditional dollar pairs the last time oil rose below…

That’s the kind of volatility and profit potential I look for in all my trades. Unfortunately, you just can’t find those in dollar trades anymore. Plus, by buying the CAD/JPY you don’t have to worry about random news events knocking out your trade.

Bottom line: Oil is on its way higher. Regardless of how you decide to play this rise, make sure you’re in the best position to profit for the next oil bull market.

Happy Trading!
Sean Hyman, aka Professor FX

A born “professor,” Sean Hyman spends his days teaching other colleagues in the financial industry how to cross over into the FX market. He has also been teaching readers here in FX University Daily since 2007. To get the full story on how Sean got his start in the FX market, and get key insights on how you can use his latest discoveries to grab 50 – 200% more on your trades, read our latest special report here.

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