Aug 9, 2018, by Eddie van der Walt
The future isn’t in oil — at least for traders trying to predict moves in currencies of the bigger energy exporters.
Crude has decoupled versus the currencies of Russia, Brazil and Canada, with internal market dynamics pushing them in different directions, according to research from Societe Generale SA, The ruble, real and Canadian dollar have bigger problems right now than a fairly stagnant crude price.
Oil’s typically a key driver of the world economy, and an indicator of the industrial cycle. Higher prices can act as a drag on global growth while enriching nations who suck it out of the soil. When other drivers such as politics take hold of their currencies, crude can become a useful diversifier for a multi-asset portfolio manager, SocGen’s analysts, including Sophie Huynh said in a note.
“The long-term relationship that existed between oil and oil-linked currencies has broken down,” they said on Thursday. “We attribute this to the increasing role of idiosyncratic factors in both oil and currencies price action.”
International disputes, elections and other political shifts have replaced crude as a key driver of the currencies, with Canada and Russia’s relationships to the U.S. among the biggest factors spurring depreciation, according to the analysis. Oil, meanwhile, is increasingly being driven by supply-side factors, with OPEC reasserting its power over the market. Brazil goes to the polls in October.
“For the Russian ruble, the sanctions have a more significant impact than oil prices, and for Canada’s dollar, it was overshadowed by uncertainty over Nafta,” Georgette Boele, a commodity and currency strategist at ABN Amro Bank NV, said by email.
Yet SocGen sees the link remaining strong elsewhere — notably to the Norwegian krone, making it their top pick among producing nations on the prediction that Brent-grade oil prices will rise from about $72.60 now to $78 a barrel by year-end. Oil is up almost 9 percent this year.
The krone should benefit from more expensive oil and strong domestic price growth in coming months, Huynh said. “Norway generates the highest inflation rate among G10 countries with a current-account surplus.”