Natural gas and the US Dollar Index
Between August 24 and August 31, 2016, natural gas (UNG) (FCG) (BOIL) (GASL) (GASX) (UGAZ) (DGAZ) October futures rose by ~1.8%. The US Dollar Index (UUP) rose by ~1.3% over this period as improving economic data boosted the chances of the Fed raising interest rates soon.
In the last five trading sessions, natural gas futures and the US Dollar Index moved in opposite directions in two instances. The correlation between the two over the last five trading sessions was -33.2%. This could mean that—apart from fundamental news—movements in natural gas could have been influenced by movement in the US Dollar Index to some extent. When the dollar falls, it usually makes commodities cheaper for importing countries—this boosts prices. However, US natural gas wasn’t exported earlier. Historically, this relationship wasn’t observed. Although the price direction and quantitative relationship between natural gas and the dollar conflicted last week, it will be interesting to see if natural gas and the dollar develop a more long-term inverse relationship—like the one between crude oil and the dollar. The US started exporting natural gas in the form of liquefied natural gas from the lower 48 states to outside North America in February 2016.
Natural gas price movements
On May 2, 2016, the US Dollar Index closed at 92.6—its lowest level year-to-date. Between May 2 and August 31, the US Dollar Index rose by ~3.7%, while natural gas futures rallied by 41.4%.
Between May 2 and August 31, the US Dollar Index and natural gas prices moved in opposite directions based on the closing price in 43 out of 85 trading sessions. The correlation was -8.1%. So, this isn’t enough evidence to point to an inverse relationship between the two, like the relationship between the US dollar and crude oil prices over the long term. A strong dollar makes crude oil expensive for crude oil–importing countries.
Impact on ETFs
Natural gas prices also impact ETFs such as the Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3x Shares (DRIP), the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), the PowerShares DWA Energy Momentum Portfolio (PXI), the Vanguard Energy ETF (VDE), and the Fidelity MSCI Energy Index ETF (FENY).