As I fired up my trading screens on Sunday night, I saw that oil was holding comfortably at $112.65 a barrel.
The oil uptrend has been one of the strongest and steadiest out there. That’s bad for many things in the global economy — and if these price levels are sustained for any length of time, it’s going to come back to haunt the global economy.
But until then, as oil prices remain high through the summer driving season, there are ways to profit from it in the currency market.
One of the best ways to play the “oil trade” through the currency market is to be a buyer of the oil-exporting countries vs. the dollar (since oil is denominated in dollars).
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There are a few ways to do this. The most common way is to short the USD/CAD pair (which has you short the dollar and long the Canadian dollar). This puts you on the side of rising oil prices.
But there are also a few other choices that many traders don’t think about. For instance, Mexico benefits from oil and so being short the USD/MXN pair also accomplishes the same thing. In fact, this is a more aggressive way to play the oil trade.
Then there’s one of the most solid fundamental oil plays out there, Norway. Norway is a huge oil exporter too and actually has better fundamentals than most countries out there right now. So shorting USD/NOK is another play.
Then if oil prices get the best of the global economy by oil prices heading too high for too long, then these plays can even be reversed and profit just the same.
So if the global GDP starts to slow down or shrink and oil falls from a lack of demand, that will be the time to reverse these trades and actually be long the dollar vs. the oil exporters.
The benefit of doing the “oil trade” through the currency market is that you don’t have to deal with rising margin requirements typically. You get better fills generally and no commissions (just the spread costs) and 24-hour trading.
The final benefit to doing this trade this way is it’s like trading oil and earning interest at the same time.
You see, each of these countries above have higher interest rates than that of the U.S. So when you’re short these pairs, you’re actually able to earn some daily interest too. That’s something that can’t be done by trading oil contracts.
So always think about the forces that are at work in the world — and which countries will benefit from those driving forces and which countries will lose from those driving forces.
Right now, oil is one of the moving forces out there right now. So the oil exporters win as long as that happens and many other countries lose at that time (including the U.S.).
About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust.
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