A dollar-oil signal? | FT Alphaville

A dollar-oil signal?

As reported here, over the last month we’ve seen the negative correlation between oil and the dollar stage an impressive return. As Stephen Schork of the Schork Report points out on Tuesday, its comeback echoes the correlation seen back in June 2007-2008. He notes that back then:

The June 2007–08 timestep saw one of the most extreme examples of negative correlation in recent memory. Oil prices and dollar rates between June 2007 to April 2008 (see above) had a negative correlation of negative (0.9477)!

Meanwhile recently:

Correlation began rising again from negative (0.63) in April to negative (0.94) in May. In fact, on any given day between the end of April and last week, if Crude booked a loss the dollar booked a gain (and vice versa) 80% of the time.

This can be seen in the following charts:

Dollar-oil correlation - Schork Report

Dollar oil trade - Schork Report

When we’ve written about this correlation before here on FT Alphaville, many regular readers came back at us with a forceful ‘so what? Every dollar-priced asset has a negative correlation with the dollar.’

Well that’s exactly the point, as Stephen Schork points out:

Dollar and crude prices shouldn’t move [in positive correlation] together for too long so something had to give, and right on cue the dollar began to fall amidst fears of inflation while oil steadily increased (partly due to the strong equities market).

Which is why, says Schork, when the US dollar regained and maintained strength from May 2008 onwards the market should perhaps have interpreted it as an easy indicator for a fall in oil.

So what to make of a sudden drop in the correlation last week? According to Stephen Schork it could well mark a signal for some sort of imminent adjustment (his emphasis):

However, at the end of last week, and following through to the instantaneous measure today, we’re seeing a much lower correlation of negative 0.58. This is due to a resurgent dollar moving upwards in tandem with crude, but as was the case in April, something’s has to give. Either the dollar will fall in the coming days, or crude will.

Related links:
So who says there’s no oil/dollar correlation?
– FT Alphaville
The coming oil-equity disconnect or the end of efficient markets theory?
– FT Alphaville
Oil, the great inflation hedge
– FT Alphaville