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How to tell if Oil is overpriced

December 20, 2010

One of the simple relationships in the trading world is the link between the Canadian Dollar and Oil.   Canada is hugely dependent on oil profits and has been for a long time now.

So it makes sense that if the price of oil goes up, the Canadian Dollar must go up as well.   You can see the link:  Spend Canadian to extract oil in Canada, sell Oil in USD, convert USD to CAD.  Simple.

So why is the Canadian Dollar hitting up against this wall at parity to the USD?

Oil does not have any problems making highs.  It has traded as high as $90 a barrel in the last few weeks.  Considering it traded under $70 just a few weeks back, that is a big gain for oil in a short amount of time.

Canada supplies more oil to the U.S. than any other country.  If oil is making highs, but the Canadian dollar isn’t, something has to move to bring the relationship back into line.

We have record supply of oil, and the Canadian isn’t following oil prices higher.   Oil is probably overpriced at $85/barrel.

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