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Trump’s Energy Policy and the Dollar-Natural Gas Relationship

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Natural gas and the US dollar

Between November 2 and November 9, 2016, natural gas (UNG) (FCG) (BOIL) (GASL) (GASX) (UGAZ) (DGAZ) December futures fell ~3.7%. The US Dollar Index (UUP) (UDN) rose 1.1% during that period.

In the past five trading sessions, natural gas futures and the US Dollar Index moved in opposite directions once. The correlation between the two over the past five trading sessions was 51.4%. So, there wasn’t an inverse quantitative relationship between them during that period. The positive correlation is likely coincidental given the short timeframe.

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When the dollar falls, it makes commodities cheaper for importing countries, which boosts prices. Earlier, US natural gas wasn’t exported. Historically, there wasn’t a relationship between natural gas and the dollar. It will be interesting to see if natural gas and the dollar develop a more long-term fundamental relationship like the one between crude oil and the dollar.

In February 2016, the US started exporting natural gas in the form of liquefied natural gas from the lower 48 states to outside North America. Donald Trump’s energy policy could lead to higher production of natural gas. It could boost natural gas exports. His policies could mean the return of coal as a source of fuel for power generators. So, natural gas prices could develop a relationship with the US Dollar Index that’s similar to the relationship between crude oil and the US Dollar Index.

Natural gas price movements

On March 3, 2016, natural gas futures closed at $1.64 per MMBtu (million British thermal units)—a 17-year low. Between March 3 and November 9, 2016, natural gas active futures rose ~64%, while the US Dollar Index rose 0.9%.

Between March 3, 2016, and November 9, 2016, the US Dollar Index and natural gas prices moved in opposite directions based on the closing prices in 92 of 175 trading sessions. The correlation was -11.4% during this period. It shows the lack of a relationship between the two over a longer period.

So, the dollar isn’t contributing to movements in natural gas right now.

Impact on ETFs

Natural gas prices impact ETFs such as the Direxion Daily S&P Oil & Gas Exploration & Production Bear 3x ETF (DRIP), the SPDR S&P Oil & Gas Exploration & Production ETF (XOP), the PowerShares DWA Energy Momentum ETF (PXI), the Vanguard Energy ETF (VDE), and the Fidelity MSCI Energy ETF (FENY).

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