Anna Andrianova & Natasha Doff
Tuesday, October 24, 2017
(Bloomberg) — The currencies of some of the world’s biggest crude exporters are breaking their historic relationship with the oil price.
The Canadian dollar has weakened, the Norwegian krone is little changed and the Russian ruble has strengthened just 4 percent in the past three months even as the price of Brent crude has surged 17 percent and West Texas oil 11 percent. In commodity-rich Latin America, the 90-day correlation between currencies and oil turned negative last month for the first time since 2014.
Commodity currencies are typically more correlated with oil when it is falling because a decline in prices often indicates a drop in demand, which is disproportionately damaging to energy-dependent economies. The link rose during the 2015-16 oil price slump, but now that foreign exchange traders have adapted to the new normal of oil below $60 a barrel, monetary policy and idiosyncratic factors have taken precedence for exchange-rate moves.
“Big movements in the commodity are associated with big movements in the terms of trade, which then should have currency consequences,” said Colin Harte, a London-based fund manager at BNP Paribas Asset Management. “Though people get excited about commodities being the dominant driver of the currency, the commodity only plays a part at certain times when there are big movements.”
Inflows from investors lured by one of the highest real yields among developing nations have trumped oil as the most important driver of the ruble this year. An expected 25 basis-point rate cut this week to 8.25 percent is unlikely to dent its carry-trade appeal, according to Anders Svendsen, an analyst at Nordea Bank A/S in Copenhagen, who thinks it will take significant rate cuts for the oil correlation to rise.
“Oil is still an important driving factor for the ruble given that Russia is one of the biggest commodity exporters,” said Piotr Matys, a London-based strategist at Rabobank. “However, there will be periods when its influence on the ruble varies. The ruble is less responsive when oil is going up, but if prices fall sharply, it will have a stronger impact.”
The Canadian dollar’s link with crude has been falling sharply since the end of June, spurred by the central bank raising interest rates for the first time since 2010. The currency’s 90-day correlation with WTI crude is now at the lowest level in almost three years.
The break is a reflection of the increased importance of central bank policy and Canadian dollar volatility rather than the declining importance of the oil sector in the domestic economy, according to Shaun Osborne, a currency strategist at Bank of Nova Scotia in Toronto. The link will come back into force if oil breaks out of the range of about $40-$60 a barrel it has been trading in all year, he said.
Stronger-than-expected growth in the economy of western Europe’s biggest oil producer has boosted the appeal of the krone in recent months, helping to diminish its vulnerability to oil moves. Still, the currency is unlikely to go much higher from here unless the central bank announces a long-awaited interest rate increase, according to Kristoffer Kjaer Lomholt, an analyst at Danske Bank AS. That means the krone is now more sensitive to oil price declines than rises, he said.
Latin America is where the break between currencies and the oil price is at the most extreme, so much so that they are now moving in a different direction. Instead, geopolitics and U.S. monetary policy have dominated this year, according to You-Na Park, a Frankfurt-based currency strategist at Commerzbank AG.
Nafta talks have whipsawed the Mexican peso and corruption allegations have dented demand for the Brazilian real. Venezuela is on the brink of default, and high real interest rates in some countries in the region have kept the currencies cushioned with capital inflows.
With assistance from Cormac Mullen, Love Liman, Alexandria Arnold and Ben Bartenstein. To contact the reporters on this story: Natasha Doff in Moscow at firstname.lastname@example.org; Anna Andrianova in Moscow at email@example.com. To contact the editors responsible for this story: Samuel Potter at firstname.lastname@example.org Cormac Mullen, Sid Verma.
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