Yesterday, after days of listening to the equity-oriented reporters and commentators on CNBC yammer about the dollar moving commodities around I read a blog comment from a forex guy saying the dollar was being driven by oil. I just couldn’t take it anymore and decided to run some numbers.
Here’s the deal. Neither market is leading the other. They are trading roughly in tandem.
I first looked at 5 minute bar prices for front month oil futures and the Dollar Index from late on May 4 to early May 13. They showed a negative correlation between % changes in the price of the two markets of about -46%. That means they are largely inversely correlated, though not completely, which is about what we’d expect to see.
I then did and offset where I look to see if current period price changes in one market correlated to price changes one period forward in the other. By that I mean, for example, does a rise in oil in the 1:05 time period correlated to a change in the dollar in the 1:10, or vice versa. Nothing. Looking at things both in terms of oil leading and the dollar leading I got correlations of near zero.
My thought was that maybe 5 minutes was just too long a timeframe to catch a lead-lag I decided to look at 1 minute bars. The timeframe is shorter (about a day and a half), but there were some sharp moves during that time frame, so I’m comfortable with it being representative.
The results? No real difference. The straight correlation between price changes came out as -52%. The forward correlations were again so close to zero as to mean no real correlation.
The conclusion? Neither market is leading the other – at least not on any consistently measurable basis. They are simply trading off the same drivers. Yet more evidence those in the media often don’t provide correct or useful information.
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