CL vs CAD

Most if not all know that the $CAD has an almost perfect correlation with CL.

If one were to venture off trading that spread, how would one go about breaking down the ratio of contracts needed to be able to do so intelligently?

I trade CL outright somewhat actively with its current volatility but would be interested in looking at the CAD/CL spread. I know a more natural spread to trade would be the NG/CL but was wondering if the CL/CAD made any sense given the correlation.

Thanks

 

I would be careful, since it seems your expertise is in the energies. I also trade energies, mostly NG, but as a Canadian I can tell you the correlation can get severely disjointed.

For example tomorrow mornings employment report, equivalent to the US NFP – most economists in this country are looking for a “miss” which they say would cement an internet rate cut next week when the BOC meets.

The interest rate market here has priced in a 50/50 chance they cut next week already, so if it beats, even if CL were to fall tomorrow, probably (I use this word because FX is sometimes hard to predict) CAD would rally despite what CL does.

With regards to NG, the media likes to talk about its correlation to CL, but it’s really about the weather. If it gets overly hot and humid or cold, NG will rally (sometimes hard) despite what CL is doing.

I would suggest whatever you want to do with CL, be it hedge or reduce risk, do it using some other CL product, such as the FOPs on it.

 

You could also look at crude vs platinum or CAD vs platinum. Depending on how you like to trade.

 

Ok but staying on commodities-to-pips spread, how would one go about getting an accurate ratio for it?

 

Using what underlyings? All futures or part dutures part spot?

 

Hi Risknav,

Last year, NG was very volatile, especially after the storage report on Thursday. Yesterday, it moved like ES. What has happened in the past few months ?

 

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Looking to use Futures contracts.

 

So volatility (as determined by option prices) is actually about 10% higher this summer compared to one year ago (it was about 30% during summer 2014 vs. about 40% right now).

If you’re talking about during the winter months, yes, NG will almost always be very volatile, both in option volatility and price range terms.

Now back to this summer and what you might be talking about, the price range of NG for the past few weeks has been very stable indeed. Just when it looked to break out to the downside, we ended up settling right back in.

The market (specs via CFTC COT report) is very short, has been for a while. We are near the historical low (mean) of NG prices, but we getting record surpluses via injections.

I want to say this market is ready to go lower, all signs point to it, but traders (including myself) and the option prices and volatility show an underlying fear the market could explode to the upside.

I personally just don’t think this market can go too much lower, sure we might try for sub-2.500 again but it seems by the time we do that we are staring at fall/winter and I definitely don’t want to be net short any size at this point.

 

[/quote]I personally just don’t think this market can go too much lower, sure we might try for sub-2.500 again but it seems by the time we do that we are staring at fall/winter and I definitely don’t want to be net short any size at this point.[/QUOTE]

Ahh but El Nino = warm and wet.