After seeing oil prices leap to USD 116 per-barrel, and fluctuation that happened in forex index – really open my eyes – what the hell is going on? Anyway, correlations tell me very little about what is driving what. Whether, USD driving oil prices, or is it oil driving USD – and impact other forex?
The first thing to note is that some of the correlation between oil prices (which denominated in USD) and USD itself, has to do with accounting. And this ‘accounting correlation’ becomes clearer if (somehow) I think about this scenario: Assume that the global oil price were stable against a basket of global currencies (GDP weighted or weighted according to where oil is produced). In that situation, if EUR/USD appreciates, that would also means that the price of oil in USD terms would go up (to counter the effect of lower oil prices in EUR terms), and this would generate an ‘accounting correlation’ between EUR/USD and oil prices denominated in USD terms. But this ‘accounting correlation’ is hardly all there is to it. Honestly, I am confused as well …
All bankers and analyst told, there are good reasons to think that a good portion of the causality in the oil vs USD correlation is running from oil price moves to USD particularly in relation to the USD/Europe.
Next question: how about Asian index? (RMB, YEN, SGD, etc)
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