The Euro-Oil Relationship
Ashraf Laidi | Jul 31, 2015 10:51AM ET
The relationship between oil prices and the euro remains unambiguously positively correlated, especially as the renewed decline in energy reflects a secular bear market in commodities accompanied by a persistent bull in the US dollar.
So, does another 5% decline in oil suggest sub-$1.05 in EUR/USD?
If oil resumes falling, say, after Iranian oil hits the market and China's slowdown takes a turn for the worse (or fails to reverse), then how can the euro survive further damage?
There are several ways, mainly via the US:
i) Prolonged oil declines will stand in the way of a Fed hike and will end up capping USD gains due to renewed CPI weakness.
ii) The extent of the above depends on if the US starts to import deflation via a strong USD and from a weakening China/Europe.
iii) The extent of the above also depends on the reaction from equities, fretting about deflation and falling capex. The contribution of non-residential investment to Q2 GDP was -0.07%, the first negative contribution since Q3 2012.
Note that the chart reveals that both oil and the euro bottomed in early 2009, well before Eurozone inflation, which was largely due to the peak in the USD, coinciding with a bottom in equities. This year, euro bulls require further improvement in inflation expectations, along with a scaling down in Fed-hike expectations.
Is that all? Not really. FX traders will want to remember that the bulk of a currency's change occur ahead of shifting policy cycles -- not after.
Get The News You Want
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.