Oil is slowly inching back up. In fact, the world’s favorite commodity has almost doubled off of its US$33 lows when it hit US$60 a barrel recently.
Of course, as a currency trader, I want to know, “Which currencies should prosper the most if oil holds above US$60?”
In the majors, I see three right off the bat that will shoot up later this year if gold can hold its current uptrend.
Financial markets are more intertwined than we’d all like to believe. Take a look at the chart below and I think you’ll see what I mean.
The Rise of Oil & Fall of the Dollar Causes this Effect!
That’s a three year chart above. So you can see that, as oil prospers, so do these other currencies.
Let’s take a look at each of them and I’ll tell you why.
Load up on These Three Currencies as Oil Tops $60…and Hold on for the Ride!
Starting at the bottom of the chart you will see the Canadian dollar. This is the first one that many think of when oil starts to climb because Canada is a major exporter of oil.
Canada’s costs to mine and refine oil are somewhat fixed, but the price they can get for it varies greatly. As the price climbs, so do their profits. As the price of oil shrinks back, so do their profits.
Therefore, you have an idea of how well Canada is doing by just seeing what oil is doing. That’s why Canada’s dollar benefits as oil rises. As oil rises, so does the sentiment for Canada and therefore its currency, because traders know their profits are “on the rise” too.
Now, in my opinion, there are other currencies that benefit more. One of them is the Aussie dollar (top chart). Why the Aussie?
Right now, Australia has the best fundamentals of all the commodity exporting countries. Therefore, as commodities as a whole stabilize and start to head higher, the Aussie dollar benefits. Why? Because the price they can get for their commodity exports increases greatly too. While they’re not an oil exporter, they do export gold, copper and other commodities.
Generally speaking, commodities tend to rise and fall as a whole. So when oil is rising, generally gold and copper and other commodities are too. This benefits Australia.
Since we’re still trying to come out of a global recession, the countries that have the best fundamentals tend to benefit the most. Also, traders are convinced that all of the “money printing” and other stimulus packages put in place around the world is bound to cause inflation too. Nothing benefits more from inflation than commodities (which are essentially inflation embodied), AND commodity currencies! That’s where the Aussie dollar shines.
The Anti-Dollar Will Soar Once Inflation Hits the Market
Then there’s the euro! Why the euro? What does it have to do with commodities? Well, here’s the way to think about this one. Generally as commodities rise, the U.S. dollar is the first currency to fall. If the U.S. dollar drops, the number one beneficiary is generally the “anti-dollar” a.k.a. the euro.
| Inflation Will Squeeze the Dollar First… |
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Since the euro is the world’s NEXT most liquid currency outside of the greenback, it tends to benefit from outflows out of the dollar firstly. So as oil and other commodities rise, the dollar falls and almost by default the euro benefits.
This is why the euro and the Aussie are my “top picks” to be in as oil holds above US$60 in the coming months ahead. Then the Canadian dollar, also known as the “Loonie,” comes in third.
In my next article, I’ll give you a glimpse at which exotic currencies will benefit as oil holds above $60. Stay tuned…
Until next time…happy trading!
Sean
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