Is selling oil and buying USD/CAD the best trade of 2017?

Dollar strength is here to stay.

Fiscal stimulus, rate hikes, $10 trillion of off-shore dollar debt, rising US yields, dollar index breaking out of a multi-year consolidation.

 

The dollar is inversely correlated with oil.

This chart shows oil (red/green) and inverted dollar (blue):

oil-dxy

 

Right now, there is massive divergence between the price of oil and the inverted dollar index.

This needs to be corrected.

Either the dollar will weaken, or the oil price will fall.

 

However, like I said, dollar strength is here to stay.

Therefore, the oil price should fall dramatically.

 

Oil is correlated with the Canadian dollar (CAD).

Therefore, if we assume oil will fall, the CAD will also fall.

 

Furthermore, the Canadian economy is weak.

The BoC should cut rates, especially after Trump’s victory.

In any case, they will not raise interest rates in the long term.

 

Combining all of this gives us an excellent trade: buying USD/CAD.

Dollar strength, causing a drop in oil prices, causing CAD weakness.

One of my top trades for 2017.

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