Certain currency pairs are highly influenced by commodities like gold and crude oil. The CADJPY is one of those pairs.
In this post, I will go over the CADJPY Oil correlation and why these currencies are so tightly linked to the price of oil.
Just like with any other trading strategy, this does not work all the time. Oil is not the only thing that affects these currencies.
However, as you will see, understanding this relationship can help you spot profitable trading opportunities.
Why There Is A High CAD JPY Oil Correlation
The reason that this pair is so heavily influenced by oil is because Canada is a big exporter of oil and Japan is a large importer of oil.
Canada is the fifth largest producer of crude oil in the world and has verified reserves that is third only to Saudi Arabia and Venezuela. A majority of Canada's oil is in oil sands.
The oil industry in Canada employs over half a million people and accounts for $18 billion in government payments.
So as you can see, crude oil accounts for very large percentage of the Canadian economy.
Since Canada is a net exporter of oil, when prices rise it also helps increase the value of the Canadian dollar.
On the other hand, Japan only meets 10% of its energy need through domestic resources. Approximately 47% of its total energy requirements are fulfilled with crude oil.
Therefore, when the price of oil goes down, it is better for the Japanese economy and usually strengthens the Japanese Yen.
So this currency pair is the most likely to have a positive correlation to the price of oil. This is all great in theory, but does it really play out in actual trading?
Let's take a look at a couple of examples…
Monthly Charts
First, let's take a step back and look at the big picture. Here is a monthly chart of US Oil prices from September 2010 to the present.
Now let's look at a CADJPY monthly chart over the same time period. At first glance, the charts do not look the same at all. But look closer…the relative magnitude of the moves is very different, but the highs and lows tend to happen around the same times. There are times when oil does move first, then the CADJPY follows.
Four Hour Charts
Now let's drill down to the four hour charts and see if the oil chart would have helped us predict where the CADJPY was going. This is a current oil chart, as of tonight. The arrow on the chart is pointing to a huge rejection of a resistance level, which would have been a clue that price could move down.
When we look at the CADJPY chart, we see continued weakness during the time that oil spiked up and rejected the resistance level. This was another clue that the CADJPY could head lower.
Of course, hindsight is 20/20. But by looking to the oil chart for confirmation, we could have certainly formulated a profitable trading plan.
Conclusion
Keep in mind that the CADJPY price does not always follow the price of oil. There are no guarantees in trading. But if you are aware of the relationship between crude oil and the CADJPY, you will have a much better chance of profiting.
I'm still formulating a solid trading plan around this relationship, but some early testing has been promising. I'll write more when I have some concrete numbers. To track oil prices, I like to use Trade Interceptor on mobile and desktop.
Do you have any tips on trading CADJPY? Let us know in the comments below…
not sure where my comment went or if something went wrong when I wrote it on my phone, but I’ll try again in case it didnt get through…
the reason why the correlation seems to be broke is the yen. All across the board you will see that the pairs with yen at the end are rising. This is because the yen is VERY weak.
In case of the cad/jpy it is so weak that even a weak oil price cannot comprehend this. But when you look at other ‘oil’ currencies, such as the NOK, you can still see the effect.
cheers
Rolf
Thanks for the input Rolf. Sorry for any confusion, but all comments have to be approved to be posted.
Hi.
The problem here is not the canadian dollar but the yen. The canadian dollar is weak indeed, but the yen is weaker. Just look as usdcad: it has been rising. And other oil currencies such as tge NOK are falling too.
But the yen is currently the weakast of all and thats why cadjpy keeps rising.
Hope it helps 🙂
Rolf
I’d love to hear you commentary on CAD/JPY and oil correlation in the past three weeks. CAD has gone through the roof while oil continues to go down. Yes, we can always use a disclaimer but I’m interested in what’s caused an extreme opposite correlation.
Hi Jeff,
I’m not really sure what is going on between CADJPY and oil right now. However, with any correlation trade, there will be times when price is very divergent and times when they move in sync. You don’t necessarily have to know why it happens, you just have to know when they are moving together and only trade during those times. Sorry, but I can’t offer more insight into the fundamental reasons why they are not highly correlated at the moment.
Cheers,
Hugh
Thanks for the reply. However I fail to see how you can tell when they are moving together and when they aren’t. Granted looking at what has happened in the past, you of course can see if they are moving together or not, but no one knows for sure when the trend will stop. So it would seem to me, to maximize your chances of predicting if they will continue to be divergent or move together, going FORWARD, you need to have some understanding of the underlying fundamentals that are driving the trend and consider if those fundamentals are changing or likely to about change. This was the reason for my original question. Unfortunately I think there is no simple answer.
Hi Jeff,
Yes, you are right, it is tough to tell when the trend will end. But that goes for any type of trade. I think that correlation is just another clue as to where price will go. A concrete trading plan needs to be formulated and tested in order to figure out the best way to make it work for each individual trader.
Fundamentals can certainly help, but I believe that it can also be traded technically. Depending on how you like to trade, you will lean on one or the other more.
Yes, your last sentence certainly says it all…there is no simple answer 🙂 My goal for this post was simply to present the opportunity. If I can find a way to provide hard data on a trading strategy, I will show it in a future post.
Cheers,
Hugh
I like your article Hugh. And as you said, no trading strategy is always right, but it doesn’t have to. Your approach of trying to find an edge is great. Trading is about connecting the dots 🙂
Btw, I also trade CAD/JPY from time to time and I really enjoyed this article from Kathy Lien (gotta admit, I am a big fan of her 😉 ) http://www.investopedia.com/articles/forex/06/commoditycurrencies.asp
She explains the correlations to oil very nicely and also goes into detail about the CAD/JPY.
However, keep us posted. I’m looking forward to your further discoveries regarding the CAD/JPY!
cheers
rolf
Hi Rolf,
Thanks for the link to her article. Hope your trading is going well 🙂