Since late September, the U.S. Dollar and crude oil have been rallying simultaneously with traders seemingly ignoring the typical relationship between the two assets. Since crude oil is a dollar-denominated asset, it tends to move in the opposite direction of the U.S. Dollar. In theory, a stronger dollar lowers demand for crude oil because it makes the asset more expensive to foreign buyers.
At times, however, we see pockets of activity on the charts when this relationship does not follow the “rules”. We may have just witnessed one of those times with speculators driving crude oil sharply higher on the news that OPEC has a deal in place to curtail output. At the same time, the U.S. Dollar rose sharply because of a rising in U.S. Treasury yields. Investors drove up yields as the chances for a rate hike in December increased greatly.
On October 20, crude oil fell more than 2 percent, erasing the previous day’s gains on profit-taking after the U.S. Dollar spiked higher after several days of sideways-to-lower activity due to worries over the timing of the next Fed rate hike.
In my opinion, crude oil traders started out a little tentative about playing the long side of the market because of the price action the day before.
Crude oil surged on Wednesday, October 19 after the U.S. Energy Information Administration reported its sixth drawdown in seven weeks. The move was primarily driven by the news of a drop of 5.2 million barrels, while…