WHILE Londoners struggle to get into the work through the snow, clever forex traders are finding a way to profit from the grim weather. Whenever the winter is cold, the commodity markets get hotter as fuel demand rockets. Demand for natural gas in the United States was above its five-year average at the end of December, and the oil price moved higher at the start of this week, now looking comfortable above $81 per barrel.
A cold snap will boost the economies of countries such as Canada, the largest exporter of oil to the United States, and Norway, Europe’s second-largest gas producer after Russia. Following Russia’s decision to cut off Ukraine’s gas supplies in 2006 following a political dispute, many European countries decided to source its gas from Norway instead.
The importance of fuel exports for these two countries can be seen in the fact that the Canadian dollar and the Norwegian krone have moved in lockstep with the oil and gas price (see chart below.)
Pressure on gas prices in particular is sure to continue. The National Grid has said that demand for gas is 30 per cent higher than normal and has asked power suppliers in the UK to use less gas as it tries to source more from overseas. When supply is tight, then, demand for Norway’s gas should increase, sending the krone higher. Likewise, oil is a popular way to heat homes in the US, which is good news for the Canadian dollar.
If you fancy taking a view on Jack Frost staying with us for a while longer, then a long position in the Canadian dollar or the Norwegian krone against the US dollar could pay off in the short term. Commodities are tightly wedded to movements in the US dollar, and since the dollar started 2010 on a weak note, commodities have moved higher. Shorting the US dollar and going long these commodity currencies therefore gives you exposure to a further fall in the greenback as well as a rise in commodity prices caused by the weather.
Since both commodity currencies are affected by other factors including interest rate differentials and the strength of the global economic recovery, taking a view on how the weather will affect the currency markets should be a short term trade and it is worth taking out tight stops in case the (arctic) winds change.
Although there is not a perfect hedge for this trade, going long short-dated US Treasury Bills will protect you against any upward movements in the US dollar. Also, you could go long the oil and gas importing currencies such as the yen or even the euro. In the longer term the direction of the Canadian dollar is less clear. It has proven to be sticky against the greenback, and has resisted reaching parity. This was partly due to strength in the US dollar in December but it was also due to the Canadian central bank, which talked down its strong currency saying it will slowdown an economic recovery. Whatever happens long-term, at the moment traders should be keeping as close as eye on the thermometer as the markets.