The Dollar Doesn’t Mix Well With Oil
The dollar doesn’t mix well with oil.
In Wall St. speak it means they are inversely correlated. Meaning one drops when the other one rises.
Here’s a chart showing price action of the dollar and oil since 1986…
As you can see, when the dollar goes up, the price of oil goes down.
Since June, the price of oil has increased 27% as the dollar fell from its recent high. Some think rising interest rates will support a “strong dollar.”
If so, then the dollar could go up and oil could go down from here.
However, President Trump has made it clear that he doesn’t like a strong dollar. In an interview with Politico back in August he said, “I like a dollar that’s not too strong.”
In short, a strong dollar gives us more purchasing power. Meaning we can buy more things with less dollars.
But it’s not always a good thing for big U.S. corporations. According to S&P Dow Jones Indices, over 40% of revenue from companies in the S&P 500 comes from international sales.
Today’s look at the dollar and oil isn’t about whether we should have a strong dollar policy. It’s about where the dollar and oil go from here.
President Trump’s policy may very well put the dollar on a downward path over the long term. If that’s the case, then oil will rise.
But there’s no need for us to guess or make our investment decisions based on politics. It’s worse than listening to the latest economic predictions.
All we need to do is follow the “big money.”
We can do this by looking at the Commitment of Traders (COT) report for the dollar and oil. This report tells us what traders are betting on.
To keep it simple, all we need to focus on in the next two charts are the large speculators and commercial speculators.
Commercial speculators are the companies that produce, explore for or use commodities. Large speculators are the big hedge funds and trading advisories.
Let’s look at the COT report for the dollar…
Look at the middle section of the chart (with the arrows). You can see the green line is large speculators, the blue line is small speculators and the red line is commercial speculators.
The green line is what we want to look at. A rising line means big money is buying dollars. A decreasing line means they are selling dollars.
As you can see, when the big money starts buying, the dollar goes up. When it sells, the dollar goes down.
Right now, the big money has reached an extreme level. This is the least bullish big money has been on the dollar since early 2016. The dollar went up about 15% after that.
You can also see it reached similar extreme levels in early 2013 and mid-2014 before gaining too.
Now, let’s look at oil…
Here, we can see big money is at an extreme level too. Look at the arrow… It’s the most bullish big money has been on oil in the last five years.
In short, big money is has been selling dollars and buying oil. Today’s charts tell us this trade has reached extreme levels.
Remember, successful investors understand price and value. They sell what’s expensive and buy what’s cheap.
The COT reports are telling us that big money loves oil and hates the dollar. Which means it’s likely that the dollar will rise and the oil price will fall in the coming weeks and months.
Keep this on your radar… Because if it does, it will mean a better opportunity to buy oil stocks.