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CAD JPY Oil Correlation Explained

Watching crude oil prices can help you fine tune your trading in the CADJPY currency pair. This post will show you why these currencies are so highly correlated to oil and how you use this to your advantage.

Home / Fundamental Analysis Tutorials / CAD JPY Oil Correlation Explained

By Hugh Kimura

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

Oil Rig

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.

SEE ALSO: 19 Powerful Positive Affirmations for Traders

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…

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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.

oil-chart

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.

cadjpy-chart

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.

h4-oil-chart

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.

h4-cadjpy-chart

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…

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Category: Fundamental Analysis Tutorials Tag: Commodities, Crude Oil

About Hugh Kimura

Hi, I'm Hugh. I'm an independent trader, educator and researcher. I help traders develop their trading psychology and trading strategies. Learn more about me here.

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First posted: October 14, 2014
Last updated: May 25, 2022

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CFTC Rules 4.41 - Hypothetical or Simulated performance results have certain limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, because the trades have not actually been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs, in general, are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profit or losses similar to those shown. Testimonials appearing may not be representative of other clients or customers and is not a guarantee of future performance or success.

 

 

 

 

 

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