Idea of the Day: Oil and FX

What: Oil price volatility has picked up sharply this week. Firstly, on Tuesday it dipped to its lowest level since November. So far on Wednesday the oil price has attempted to recover, although at the time of writing oil traders are waiting for the all-important US DOE inventory data, which could cause further short term price swings.

What: Oil price volatility has picked up sharply this week. Firstly, on Tuesday it dipped to its lowest level since November. So far on Wednesday the oil price has attempted to recover, although at the time of writing oil traders are waiting for the all-important US DOE inventory data, which could cause further short term price swings. Yesterday, we pointed out that Glencore had the least sensitivity to oil price moves compared with other companies in the energy sector, today we are doing a similar analysis but looking at FX.

How: We have looked at the daily correlations between Brent and WTI crude prices and CAD/USD, NOK/ EUR, AUD/USD and RUB/USD. Here are the results:

  • NOK/EUR has had the strongest sensitivity to both the Brent and WTI oil prices since the start of the year.
  • The Rubble is the most sensitive to WTI in the short-term - since the start of June.
  • In the short term, the CAD is the most sensitive to Brent compared to the other commodity currencies. This is ironic, since some may have expected the CAD to be more closely correlated to US oil prices…
  • The Aussie has the weakest correlation to both the Brent and WTI price in both the short and the long term.
  • As you can see in the chart below, the oil price has been subjected to significantly more downward pressure in the last month compared with the commodity FX space, suggesting that commodity currencies, so far, have survived the worst of the oil price sell off.

Thus, if you are trading currencies at the same time as oil price volatility is rising, trade the Aussie if you want to try and block out the oil price moves. In contrast, in the short term the Rubble is most likely to decline when the WTI oil price is falling, whereas the CAD is most at risk on a short-term basis when the Brent oil price is declining.

Chart: 

Source: City Index and Bloomberg 

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