Monday, November 21, 2016

WTIC West Texas Crude Oil and USD US Dollar Index Weekly Charts; Inverse Correlation is Out of Sync

The oil and US dollar charts display their expected inverse correlation over the last couple years. As is typically expected, as the dollar rises, oil, and commodities such as gold, drop. The blue lines show the dollar rising and correspondingly, oil drops. The pink lines show the dollar index retreating lower so oil and commodities rise. This correlation continues happily along until September when the relationship becomes shaky.

The USD leads oil so there may be a couple-week delay in the response. The dollar was dropping 3 and 4 weeks ago but oil dropped as well. Donald Trump wins the US presidential election on 11/8/16. Markets go crazy with traders believing that Trump's policies will boost inflation. Treasury yields rocket higher as notes and bonds are sold off. The US dollar rises with the yields.

At the same time, traders are tripping over each other to buy commodities believing that a new stimulus plan from the US will boost construction and infrastructure activity. Copper, zinc and other metals launch higher including oil. The ongoing OPEC drama about proposed production cuts also influences oil prices.

After the US election, the dollar launches from 96 to above 101. Oil initially drops, as would be expected, with the higher dollar, but last week oil rises with the rising dollar. The brown circle shows the inverse correlation falling apart since September.

The expectation would be for the oil and dollar inverse relationship to resume. Thus, oil should retreat lower with the buoyant dollar, or, if the dollar retreats back inside the safety of the long-term sideways channel, oil should remain buoyant. Considering the potential breakout higher in the dollar shown on the chart, WTIC would be expected to be under 40 right now; it's not.

Trump's infrastructure and other proposed programs, and the ongoing OPEC oil production cut drama, conspire to keep oil prices buoyant despite the rising dollar. Thus, the USD, Trump's path forward and the OPEC decision on a production freeze are The Three Stooges currently impacting the oil prices. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.

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