Since 2002 the euro has trended steadily higher versus the U.S. dollar. The same is true of the price of a barrel of oil versus the U.S. dollar. Recognition of the inverse correlation between the falling U.S dollar and the rising price of oil has been used by professional investors to profitable advantage for the past seven years. The correlation pattern will not only continue, the strength of the correlation will increase.
Investors must have an advantage over other market participants in order to enjoy lower risk and higher return on investments. There has been no better barometer of crude market direction than its correlation to the currency pairing value of the euro vs US$. This relationship was most evident in September of 2008 with the destruction of Lehman Brothers. The correlation coefficient reached an all time high of .93. Investors alert to the rapid rise in the strength of the dollar knew crude had much further to fall.
Investors must be aware that although crude and the dollar move inversely, the movement alerts to trend direction not exact price movements. Yesterday, the US$ rose almost 300 points vs the euro. However, crude along with gas and diesel futures remained flat to slightly higher on the trading session. This price action also indicates that the energy complex is anticipating a rebound in the euro.
There are literally hundreds of factors affecting the price of crude each day. The key to successful investing is knowing which factors will have the greatest influence. Staying alert to directional price movements of the euro/US$ currency pair will give the investor the competitive advantage needed to maintain sufficient return on capital.
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