OPEC is planning to increase output, but there is still a long way to go before things return to normal. The correlation between oil and FX majors is now relatively low, according to strategists at Danske Bank. In terms of foreign exchange, the trajectory of Fed policy and reflation is more important than OPEC choices.
“Following substantial cuts since the commencement of COVID-19 in 2020, OPEC is widely expected to resume its slow-moving normalisation of output levels this week. In our opinion, the Fed’s turn and a higher currency, along with increased output, will keep Brent oil around $70/bbl. However, the link between spot oil and FX is now relatively low.”
“If oil prices fall below these levels as a result of growing supply, it is unlikely to have a significant impact on FX. The link between FX and spot oil looks to be quite low at the moment, and this is probable because other forces are taking precedence.”
“The impact of higher oil prices on spot for EUR/USD is yet unclear. The relationship between spot oil and the reflation theme across assets appears to be significantly weaker. Furthermore, if oil falls on the back of growing supply, it is not the same as when the underlying cause is a lack of demand – especially for cyclical currencies.”
“Oil may increase more at some time if OPEC maintains its conservative production policy. If rising oil prices cause equities to become more volatile at some time, this will likely be tradeable in a stronger broad dollar, but we do not believe this is a relevant concern right now.”
“Other factors such as oil and OPEC will continue to be overshadowed by the reflation trade and Fed’s policy. We are still bullish on the US dollar.”
Continue reading
