Correlation Between Crude Oil and US Dollar

Can any of the company-specific risk be diversified away by investing in both Crude Oil and US Dollar at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Crude Oil and US Dollar into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Crude Oil and US Dollar, you can compare the effects of market volatilities on Crude Oil and US Dollar and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Crude Oil with a short position of US Dollar. Check out your portfolio center. Please also check ongoing floating volatility patterns of Crude Oil and US Dollar.

Diversification Opportunities for Crude Oil and US Dollar

0.85

Correlation Coefficient

Crude Oil  US Dollar

Very poor diversification

The 3 months correlation between Crude and DXUSD is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Crude Oil and US Dollar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on US Dollar and Crude Oil is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Crude Oil are associated (or correlated) with US Dollar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of US Dollar has no effect on the direction of Crude Oil i.e., Crude Oil and US Dollar go up and down completely randomly.

Pair Corralation between Crude Oil and US Dollar

Assuming the 90 days horizon Crude Oil is expected to generate 3.21 times more return on investment than US Dollar. However, Crude Oil is 3.21 times more volatile than US Dollar. It trades about 0.0 of its potential returns per unit of risk. US Dollar is currently generating about -0.13 per unit of risk. If you would invest  6,962  in Crude Oil on December 26, 2024 and sell it today you would lose (48.00) from holding Crude Oil or give up 0.69% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	100.0%
Values	Daily Returns

Crude Oil  vs.  US Dollar

Crude Oil

Risk-Adjusted Performance

Very Weak

Over the last 90 days Crude Oil has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Crude Oil is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

US Dollar

Risk-Adjusted Performance

Very Weak

Over the last 90 days US Dollar has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, US Dollar is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Crude Oil and US Dollar

The main advantage of trading using opposite Crude Oil and US Dollar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Crude Oil position performs unexpectedly, US Dollar can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in US Dollar will offset losses from the drop in US Dollar's long position.

The idea behind Crude Oil and US Dollar pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

Check out your portfolio center.

Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.