فهد بن محمد
15-01-2006, Sun 1:44 PM
It seemed as if it was only yesterday (or a little over a year ago) that traders were claiming $40 would be the highest that oil prices could rally. Now, in retrospect, in the minds of many of those same traders, $40 seems to be the lowest to which we could see oil prices fall once again. http://www.fxcm.com/images/100k_practice_140x99.gif (http://www.fxcm.com/open-free-100k.jsp;jsessionid=PAECJDGMMCBI)
Oil Speculators Trade Currency. You Can Too! (http://www.fxcm.com/open-free-100k.jsp)
2005 has been a banner year for oil prices. At one point, the price of crude broke above $70 a barrel level, which was over 65% higher than the $42.50 at the beginning of the year. Despite a reversal in the month of August, prices still ended up over 45% for the year. It seemed as if it was only yesterday (or a little over one year ago) that many traders were claiming $40 would be the highest that oil prices could rally. Now in retrospect, there is probably little hope that we would ever see prices below $40 again in the near future. The volatility of energy prices over the past year and the sharp rally has nearly everyone scratching their heads about where oil prices may be headed next and what currency pair they could trade to profit from that view. Some oil traders are calling for $80 a barrel while more aggressive ones are setting their sights on $100. Yet, in every scenario there are skeptics who also have valid arguments and in this case, oil skeptics are calling the rally a speculative bubble that will burst sooner or later. However for the actual majority that are banking on higher oil prices, trading currencies instead of oil may be more profitable endeavor due to the unique ability to earn not only capital appreciation, but also interest income, something futures contracts cannot offer.
The rise in oil has made headlines across the globe for months now. Strong demand from China and India, the lack of ability by Saudi Arabia (and other OPEC countries) to increase oil production as well as weather related supply shocks have fueled the continual rise in crude oil prices. More recently, disputes between Russia and the Ukraine have also pushed oil prices higher. Although gas supplies to Europe have since returned to normal, this is a far more deep seeded conflict that could resurface since Russia is adamant about increasing prices to the Ukraine while the Ukraine acts as Russia’s doorway to Europe. 90 percent of Russia’s gas exports pass through Ukraine, supplying 40 percent of the EU’s oil. At present, it seems that Russia is only siphoning out enough oil to meet their customers’ needs, leaving no spare supply for the Ukraine. For the time being, the Ukraine has enough supplies to last for a few weeks which will keep oil speculators at bay and this issue on the back burner, but if they exhaust that supply and resort to extracting oil from the pipeline before negotiations are completed, Russia would accuse them of stealing the oil and we could see another shock to oil markets once again. In the meantime, the bigger focus continues to be the Fed.
From our economics 101 textbooks, we remember that high oil prices act as a tax for consumers by slowing down consumer spending, which eventually takes a bite out of growth. Yet the actual impact of oil prices on different currencies can be very mixed. Some currencies stand to benefit significantly from rising oil prices while others suffer greatly. Traditionally we know that commodity currencies rally when energy prices increase because those currencies are from countries that tend to be net exporters of commodities such as crude oil. Therefore the oil producers within the country are simply reaping higher profits for the same barrel of oil. Currencies of countries that are net oil importers on the other hand face increasingly higher costs whenever energy prices rise. So taking a look at this from a net oil exporter / importer perspective, the currency pair that should be impacted the most by changes in energy prices is the Canadian Dollar and the Japanese Yen (CADJPY).
Why CADJPY?
There are many reasons why CADJPY should be on the top of list of currencies to trade for those who have a view on oil prices. As indicated in the chart below, there is a clear relationship between both of these instruments. Since the beginning of 2004, oil prices and the Canadian Dollar / Japanese Yen (CADJPY) currency pair have had an 87% positive correlation. In fact, for the most part, oil even acts as a leading indicator for CADJPY. This relationship stems from the basic characteristics of each of these countries:
Canada is the world’s ninth largest crude oil producer and they continue to climb up the list with production in oil sands increasing regularly. In 2000, Canada surpassed Saudi Arabia as the US’ most significant oil supplier. Unbeknownst to many, the size of their oil reserves is second only to Saudi Arabia. The geographical proximity between the US and Canada as well as the growing political uncertainty in the Middle East and South America makes Canada one of the more desirable places for the US to import oil from. Yet Canada does not just service US demand. The country’s vast oil resources are beginning to get a lot of attention from China especially since Canada has recently stumbled upon a new stash of oil after a reclassification of their Alberta oil sands to the economically recoverable category. China has begun to take stakes in Canadian oil companies including picking up a one-sixth interest in MEG Energy Corp. PetroChina International also signed a cooperation agreement with one of Canada’s largest pipeline companies. China-Canada energy cooperation is only expected to increase further barring any huge protests by the US. China currently imports 32% of its oil and according to a report by the International Energy Agency, China’s import needs are expected to double by 2010 and match that of the US by 2030. This makes Canada and the Canadian dollar one of the best currencies positioned to benefit from a continual surge in oil prices.
On the other side of the spectrum, Japan imports 99% of its oil (compared to the US’ 50%). Their lack of domestic sources of energy and their need to import vast amounts of crude oil, natural gas, and other energy resources makes them particularly sensitive to changes in oil prices. There is an inherent fear that continual increases in oil prices could derail the Japanese economic recovery. Although Japan has been able to better weather the fluctuations as time passes, they are still not immune to the drag that oil prices will have on the global economy. If oil prices continue to rise, it will sap global demand, weakening purchases of Japanese exports. In recent weeks, the Japanese Yen itself has had a close negative correlation with the price fluctuations in oil prices. As oil prices firm, the Japanese Yen is expected to continue to under perform.
http://www.fxcm.com/images/cadjpy-oilprices.gif
As indicated in the chart above, if the correlation that we have seen over the past year and a half holds, then should oil prices hit $80 a barrel, we would also expect to see CADJPY head towards $100. If oil prices retrace to $40 a barrel on the other hand, then CADJPY could fall back to $80.
So the next logical question to ask is would be “Will Oil Prices Hit $80 or Retrace Back to $40?”
There has been a lively debate even within the world of economists about where oil prices may be headed over the next few months. The fire fueling the rise in oil is demand exceeding supply and with supplies having only limited room to grow and demand expected to skyrocket over the next few years, oil prices could continue to head higher. Goldman Sachs recently reconfirmed their forecast for oil prices to spike above $100. Also, tensions with Iran are also increasing. With speculation that Iran may be building nuclear arms, if tensions exacerbate, the oil market could suffer. Iran is the world’s is the second largest producer in OPEC, sitting on 10% of the world's proven reserves of oil and fully 25% of the world's reserves of natural gas. If prices stay elevated, then $100 becomes even more of a possibility as we continue in the winter season when energy usage is generally at its highest.
On the flip side, at some point in the oil price rally, consumers and businesses will have to throw in the towel and start taking measures to cut their consumption or expenditures. This may happen in baby steps with consumers first delaying automobile purchases or simply driving their cars less because ultimately the numbers do add up. Since the beginning of last year, the average price of a gallon of gasoline increased by 45 cents. This means that for a SUV that has a fuel tank of 25 gallons, the 45-cent increase in gasoline prices amounts to an $11.25 increase in the cost of filling up the tank. If we hit $100 a barrel, gasoline prices could shoot up to $3 a gallon, at which point the SUV owner would go from paying $45 at the beginning of the year to fill up the tank to $75. The capitulation point could be when we finally see oil prices reverse and head back towards $40 a barrel. However that may very well require a further rally in oil.
The reason why CADJPY is a better product to express your oil $100 view than the futures contracts themselves is because of the ability to earn interest. If you buy direct oil futures contracts and oil goes up, you will get to earn capital gains. However if you buy CADJPY spot, and oil rallies, you will not only earn capital gains, but also be able to sit back and earn interest on a daily basis. Canada offers a 3.25 percent positive interest rate differential over Japan , which seems little at first glance. However factoring in leverage, the interest income is substantially higher. No other product can offer both interest and capital gains. Yet it is also important to note that the opposite is true as well. For those who think oil prices will top out and move lower, selling CADJPY will require paying interest on daily basis
منقول للفائده والنقاش
Oil Speculators Trade Currency. You Can Too! (http://www.fxcm.com/open-free-100k.jsp)
2005 has been a banner year for oil prices. At one point, the price of crude broke above $70 a barrel level, which was over 65% higher than the $42.50 at the beginning of the year. Despite a reversal in the month of August, prices still ended up over 45% for the year. It seemed as if it was only yesterday (or a little over one year ago) that many traders were claiming $40 would be the highest that oil prices could rally. Now in retrospect, there is probably little hope that we would ever see prices below $40 again in the near future. The volatility of energy prices over the past year and the sharp rally has nearly everyone scratching their heads about where oil prices may be headed next and what currency pair they could trade to profit from that view. Some oil traders are calling for $80 a barrel while more aggressive ones are setting their sights on $100. Yet, in every scenario there are skeptics who also have valid arguments and in this case, oil skeptics are calling the rally a speculative bubble that will burst sooner or later. However for the actual majority that are banking on higher oil prices, trading currencies instead of oil may be more profitable endeavor due to the unique ability to earn not only capital appreciation, but also interest income, something futures contracts cannot offer.
The rise in oil has made headlines across the globe for months now. Strong demand from China and India, the lack of ability by Saudi Arabia (and other OPEC countries) to increase oil production as well as weather related supply shocks have fueled the continual rise in crude oil prices. More recently, disputes between Russia and the Ukraine have also pushed oil prices higher. Although gas supplies to Europe have since returned to normal, this is a far more deep seeded conflict that could resurface since Russia is adamant about increasing prices to the Ukraine while the Ukraine acts as Russia’s doorway to Europe. 90 percent of Russia’s gas exports pass through Ukraine, supplying 40 percent of the EU’s oil. At present, it seems that Russia is only siphoning out enough oil to meet their customers’ needs, leaving no spare supply for the Ukraine. For the time being, the Ukraine has enough supplies to last for a few weeks which will keep oil speculators at bay and this issue on the back burner, but if they exhaust that supply and resort to extracting oil from the pipeline before negotiations are completed, Russia would accuse them of stealing the oil and we could see another shock to oil markets once again. In the meantime, the bigger focus continues to be the Fed.
From our economics 101 textbooks, we remember that high oil prices act as a tax for consumers by slowing down consumer spending, which eventually takes a bite out of growth. Yet the actual impact of oil prices on different currencies can be very mixed. Some currencies stand to benefit significantly from rising oil prices while others suffer greatly. Traditionally we know that commodity currencies rally when energy prices increase because those currencies are from countries that tend to be net exporters of commodities such as crude oil. Therefore the oil producers within the country are simply reaping higher profits for the same barrel of oil. Currencies of countries that are net oil importers on the other hand face increasingly higher costs whenever energy prices rise. So taking a look at this from a net oil exporter / importer perspective, the currency pair that should be impacted the most by changes in energy prices is the Canadian Dollar and the Japanese Yen (CADJPY).
Why CADJPY?
There are many reasons why CADJPY should be on the top of list of currencies to trade for those who have a view on oil prices. As indicated in the chart below, there is a clear relationship between both of these instruments. Since the beginning of 2004, oil prices and the Canadian Dollar / Japanese Yen (CADJPY) currency pair have had an 87% positive correlation. In fact, for the most part, oil even acts as a leading indicator for CADJPY. This relationship stems from the basic characteristics of each of these countries:
Canada is the world’s ninth largest crude oil producer and they continue to climb up the list with production in oil sands increasing regularly. In 2000, Canada surpassed Saudi Arabia as the US’ most significant oil supplier. Unbeknownst to many, the size of their oil reserves is second only to Saudi Arabia. The geographical proximity between the US and Canada as well as the growing political uncertainty in the Middle East and South America makes Canada one of the more desirable places for the US to import oil from. Yet Canada does not just service US demand. The country’s vast oil resources are beginning to get a lot of attention from China especially since Canada has recently stumbled upon a new stash of oil after a reclassification of their Alberta oil sands to the economically recoverable category. China has begun to take stakes in Canadian oil companies including picking up a one-sixth interest in MEG Energy Corp. PetroChina International also signed a cooperation agreement with one of Canada’s largest pipeline companies. China-Canada energy cooperation is only expected to increase further barring any huge protests by the US. China currently imports 32% of its oil and according to a report by the International Energy Agency, China’s import needs are expected to double by 2010 and match that of the US by 2030. This makes Canada and the Canadian dollar one of the best currencies positioned to benefit from a continual surge in oil prices.
On the other side of the spectrum, Japan imports 99% of its oil (compared to the US’ 50%). Their lack of domestic sources of energy and their need to import vast amounts of crude oil, natural gas, and other energy resources makes them particularly sensitive to changes in oil prices. There is an inherent fear that continual increases in oil prices could derail the Japanese economic recovery. Although Japan has been able to better weather the fluctuations as time passes, they are still not immune to the drag that oil prices will have on the global economy. If oil prices continue to rise, it will sap global demand, weakening purchases of Japanese exports. In recent weeks, the Japanese Yen itself has had a close negative correlation with the price fluctuations in oil prices. As oil prices firm, the Japanese Yen is expected to continue to under perform.
http://www.fxcm.com/images/cadjpy-oilprices.gif
As indicated in the chart above, if the correlation that we have seen over the past year and a half holds, then should oil prices hit $80 a barrel, we would also expect to see CADJPY head towards $100. If oil prices retrace to $40 a barrel on the other hand, then CADJPY could fall back to $80.
So the next logical question to ask is would be “Will Oil Prices Hit $80 or Retrace Back to $40?”
There has been a lively debate even within the world of economists about where oil prices may be headed over the next few months. The fire fueling the rise in oil is demand exceeding supply and with supplies having only limited room to grow and demand expected to skyrocket over the next few years, oil prices could continue to head higher. Goldman Sachs recently reconfirmed their forecast for oil prices to spike above $100. Also, tensions with Iran are also increasing. With speculation that Iran may be building nuclear arms, if tensions exacerbate, the oil market could suffer. Iran is the world’s is the second largest producer in OPEC, sitting on 10% of the world's proven reserves of oil and fully 25% of the world's reserves of natural gas. If prices stay elevated, then $100 becomes even more of a possibility as we continue in the winter season when energy usage is generally at its highest.
On the flip side, at some point in the oil price rally, consumers and businesses will have to throw in the towel and start taking measures to cut their consumption or expenditures. This may happen in baby steps with consumers first delaying automobile purchases or simply driving their cars less because ultimately the numbers do add up. Since the beginning of last year, the average price of a gallon of gasoline increased by 45 cents. This means that for a SUV that has a fuel tank of 25 gallons, the 45-cent increase in gasoline prices amounts to an $11.25 increase in the cost of filling up the tank. If we hit $100 a barrel, gasoline prices could shoot up to $3 a gallon, at which point the SUV owner would go from paying $45 at the beginning of the year to fill up the tank to $75. The capitulation point could be when we finally see oil prices reverse and head back towards $40 a barrel. However that may very well require a further rally in oil.
The reason why CADJPY is a better product to express your oil $100 view than the futures contracts themselves is because of the ability to earn interest. If you buy direct oil futures contracts and oil goes up, you will get to earn capital gains. However if you buy CADJPY spot, and oil rallies, you will not only earn capital gains, but also be able to sit back and earn interest on a daily basis. Canada offers a 3.25 percent positive interest rate differential over Japan , which seems little at first glance. However factoring in leverage, the interest income is substantially higher. No other product can offer both interest and capital gains. Yet it is also important to note that the opposite is true as well. For those who think oil prices will top out and move lower, selling CADJPY will require paying interest on daily basis
منقول للفائده والنقاش