CAD/USD and crude: first the correlation, then the band gap

A commodity-currency, not a standalone rate

Canadian merchandise trade in 2014 was led by oil at US$128.9 billion, or 27.2 percent of total exports, far ahead of vehicles at 12.6 percent. That export mix is why CAD priced in US dollars can be studied as a commodity-currency: an exchange rate tightly linked to a major export commodity, and therefore as a two-market spread rather than as a standalone rate.

How tightly CAD tracked crude

Over a sample running from the start of 2005 through early September 2015, the Pearson correlation between CAD priced in US dollars and continuous WTI crude futures was 0.81. A 10-year scatter through September 2015 produced a coefficient-of-determination of about 0.65 and a slope of 0.003, so a one-dollar move in crude corresponded to roughly 0.3 cents in CAD/USD.

In the same 10-year correlation table, CAD/USD showed a 0.83 link with NOK/USD, a 0.76 link with the Philadelphia Gold & Silver Sector Index, and only a 0.43 link with the iShares S&P GSCI Commodity Indexed Trust.

Where the linear fit broke down

The 10-year scatter fit broke down above about $115 and below about $35 oil and above about 1.05 in CAD/USD. Those edges sit outside the region where a single slope described the usual CAD-crude relationship.

Weekly leads around the 2008 extremes

On a weekly overlay, CAD/USD peaked in November 2007, nearly eight months before crude's July 2008 high near $145, and bottomed on 24 October 2008, almost two months before crude's crisis low near $33. The pair and the commodity did not always turn in the same week.

Comparing bollinger-band-position

The published rules compare 20-day bollinger-band-position on CAD and on front-month crude. Bollinger-band-position is a scaled reading of where price sits between the lower and upper volatility bands over a fixed lookback, used so two markets can be compared on a common scale. Intermarket-divergence is then a temporary gap between the usual co-movement of those related markets, read by comparing each market's position inside its own volatility bands.

Archive entry filters

The published rules require a three-bar divergence reading beyond 20 percent that is already reversing, a two-day rate-of-change filter on CAD, a 40-day crude moving-average tilt, and a 20-day correlation not worse than -0.4. That last condition is the correlation-filter: a rolling Pearson measure that confirms the two markets are still moving together before a divergence reading is accepted.

Archive exits and covers

The same code exits or covers when MACD and a 30,3 stochastic agree, when a three-bar band-divergence extreme coincides with a sharp three-day crude rate of change, or when a 15-bar breakout arrives while 60-day correlation has fallen below -0.4.