Fundamental analysis Market interconnections

Connection between Oil, the Canadian Dollar, and the Norwegian Krone

Elena Berseneva 15 march 2022 246 3

In this article, we will estimate connection between the oil price and the rates of the Canadian dollar and the Norwegian krone.


Oil is the most critical energy source in the world. It accounts for 33% of global energy consumption. It has high energy intensity and is convenient for transportation that makes it almost an indispensable energy resource. 

Oil as the major energy raw material is the base of economic resilience of most of the developed global economies. Among them are the Canadian and Norwegian economics.

 

Canada and Norway depend on raw material export including oil which is a significant part of overall volume of the exported commodities. That is why, the currency pairs including the Canadian dollar and the Norwegian krone are highly volatile and more liquid. And some similarities in price movements for oil and these currencies are identified with the analysis of price data.

Hypothesis
To conclusion

There is a correlation between price changes for oil and the rates of the Canadian dollar, and the Norwegian krone.

To conclusion
Data used

Historical data on quotes of futures for Brent oil.

  • Timeframe: D1.
  • The history covers the period of June 1988 until May 2019.
  • Total: 7,890 values.


Historical data on USDCAD quotes.

  • Timeframe: D1.
  • The history covers the period of January 1982 until May 2019.
  • Total: 9,750 values.


Historical data on USDNOK quotes.

  • Timeframe: D1.
  • The history covers the period of December 1979 until May 2019.
  • Total: 10,256 values.

The Canadian dollar and oil

 

Modern Canada is a large world manufacturer and exporter of oil products. By volume of oil reserves (approximately 15% of global), it is second only to Venezuela and Saudi Arabia.

 

The Canadian dollar is the basic commodity currency of the American region.

 

The influence of the American dollar on the Canadian dollar is very strong as the main consumer of the Canadian commodities and goods is the USA.

 

The USDCAD currency pair or luni is one of the seven basic currency pairs which is, according to the data of the Bank for International Settlements, around 8% of the total turnover of the forex market and together with crosses is around 10%.

 

For the Canadian economy, «black gold» is a significant part of the income of the country’s budget.

 

Statistically, the correlation between the Canadian dollar and oil is about 70% but this connection recently becomes weaker and more complex.



Let us identify correlation between changes in oil prices and the rate of USDCAD by week for the period of 32 years using correlation coefficient:


PERIOD
Oil/ USDCAD
PERIOD
Oil/ USDCAD
PERIOD
Oil/ USDCAD
PERIOD
Oil/ USDCAD
1 week
-0.176
15 week
-0.185
29 week
-0.185
43 week
-0.329
2 week
-0.236
16 week
-0.226
30 week
-0.261
44 week
-0.327
3 week
-0.275
17 week
-0.312
31 week
-0.287
45 week
-0.314
4 week
-0.295
18 week
-0.258
32 week
-0.194
46 week
-0.110
5 week
-0.142
19 week
-0.375
33 week
-0.290
47 week
-0.390
6 week
-0.350
20 week
-0.257
34 week
-0.351
48 week
-0.327
7 week
-0.335
21 week
-0.292
35 week
-0.273
49 week
-0.195
8 week
-0.309
22 week
-0.378
36 week
-0.224
50 week
-0.404
9 week
-0.181
23 week
-0.225
37 week
-0.163
51 week
-0.104
10 week
-0.323
24 week
-0.171
38 week
-0.272
52 week
-0.078
11 week
-0.295
25 week
-0.372
39 week
-0.271
53 week
-0.301
12 week
-0.299
26 week
-0.301
40 week
-0.209
13 week
-0.183
27 week
-0.163
41 week
-0.358
14 week
-0.470
28 week
-0.211
42 week
-0.275


Correlation coefficients between changes in oil prices and the rate of USDCAD are negative for the whole period under our review. A moderate negative correlation is estimated at the 14th week of the year.

 

The correlation coefficient for the whole period is equal to -0.265. So, a weak inverse correlation between changes in the price for oil and the rate of USDCAD.

 

 

The Norwegian krone and oil

 

In Europe, the major hydrocarbon fields are in the northern seas. Norway and the United Kingdom have access to them. While, most of the extracted energy resources are consumed independently by the British. Norway contributes to the export sector.

 

The Norwegian economy is significantly represented by the oil and gas industry that makes the Norwegian krone a commodity currency which depends on the oil price.

 

This is not to say that the government economy depends entirely on the petrodollar but the government has been conducting an active policy of removing Norway from “the oil curse”.

 


Let us identify connection between changes in the price for oil and the rate of USDNOK by week using correlation coefficient:


PERIOD
Oil/ USDNOK
PERIOD
Oil/ USDNOK
PERIOD
Oil/ USDNOK
PERIOD
Oil/ USDNOK
1 week
-0.207
15 week
-0.085
29 week
-0.010
43 week
-0.351
2 week
0.018
16 week
-0.173
30 week
-0.251
44 week
-0.097
3 week
0.066
17 week
-0.175
31 week
-0.277
45 week
-0.338
4 week
-0.209
18 week
-0.285
32 week
-0.163
46 week
-0.172
5 week
-0.248
19 week
-0.437
33 week
-0.290
47 week
-0.324
6 week
-0.318
20 week
-0.108
34 week
-0.080
48 week
-0.332
7 week
-0.198
21 week
-0.232
35 week
-0.173
49 week
-0.198
8 week
-0.302
22 week
-0.139
36 week
-0.138
50 week
-0.239
9 week
-0.061
23 week
-0.305
37 week
-0.160
51 week
-0.228
10 week
-0.255
24 week
-0.207
38 week
-0.119
52 week
-0.211
11 week
-0.283
25 week
-0.267
39 week
-0.295
53 week
-0.476
12 week
-0.312
26 week
-0.265
40 week
-0.221
13 week
-0.274
27 week
-0.216
41 week
-0.411
14 week
-0.390
28 week
-0.170
42 week
-0.223


Correlation coefficients between changes in prices for oil and the rate of USDNOK are negative for the whole period under our review excluding the 2nd and 3rd weeks. A moderate negative correlation is estimated at the 53rd week of the year.

 

Correlation coefficient for the whole period is equal to -0.213. It means that a weak inverse correlation between changes in price for oil and the rate of USDNOK has been identified.

Conclusion

A weak correlation between the price changes for oil and the rates of the Canadian dollar and the Norwegian krone has been identified.

Detailed results are shown in the Appendix:

XLSX (0.01 MB)Application to the article 'Oil's relationship to the canadian dollar and Norwegian Krona'.xlsx

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