Is the price of crude oil related to currency?
There is a hidden rope that links money to crude oil. Price volatility in one place forces sympathy or opposition in another. There are many reasons for this correlation, including resource allocation, trade balance (BOT) and market psychology. In addition, the significant contribution of crude oil to inflation and deflationary pressures exacerbated these correlations during periods of clear trends (up and down).
Countries that buy crude oil and countries that produce crude oil exchange dollars in the crude oil dollar system. So, is the price of crude oil related to currency?
Crude oil and dollars
Crude oil is quoted in dollars. Therefore, every rise or fall in the price of the US dollar or commodities will immediately lead to a readjustment between the US dollar and many foreign exchange cross exchange rates. These changes are less relevant in countries with no large crude oil reserves, such as Japan, but higher in countries with large oil reserves, such as Canada, Russia and Brazil.
There is an inherent relationship between crude oil and currency. The price fluctuation of one force will have a positive or negative reaction to the other, while the other will have a positive or negative impact on countries with large foreign exchange reserves. The dollar benefited from the sharp drop in crude oil prices, as the energy sector is an important component of US GDP.
Countries that rely heavily on crude oil exports suffer more economic losses than countries with more diversified resources.
The impact of the euro
At the end of 2014, after the consumer price index (CPI) in the euro area turned negative, the collapse of crude oil prices triggered deflation panic.
At the beginning of 2015, the European Central Bank (ECB) was under tremendous pressure to launch a massive monetary stimulus plan to stop the deflationary spiral and bring inflation into the system. The first round of bond purchases for the European version of quantitative easing (QE) began in the first week of March 2015. The European Central Bank's quantitative easing policy continued until mid-2018.
Many foreign exchange market participants are fully focused on the euro / dollar cross rate, the most popular and liquid money market in the world. In March 2014, the US dollar peaked against the US dollar. Just three months later, crude oil prices fell mildly and accelerated in the fourth quarter. Meanwhile, crude oil prices fell from more than $80 to more than $50. Selling pressure on the euro continued until March 2015, while the European Central Bank launched a monetary stimulus plan.
The impact of the dollar
Although the United States ranks higher in global oil production, the dollar has benefited from the sharp fall in crude oil prices for several reasons. First, compared with its trading partners, the U.S. economy has grown exceptionally strong since the bear market, keeping its balance sheet intact. Second, despite the huge contribution of the energy sector to US GDP, US economic growth is still slowing down, and its huge economic diversity has reduced its dependence on a single industry.
The result of over dependence on crude oil imports
It makes sense that countries that are more dependent on crude oil exports suffer more economic losses than countries with more diversified resources. Russia is a perfect example, with energy exports accounting for 58.6% of its total exports in 2014.
In 2015, the country fell into a severe recession, and GDP in the second quarter of 2015 fell by 4.6% year-on-year, which was exacerbated by sanctions imposed by the western invasion of Ukraine. GDP in the third quarter of 2015 decreased by 2.6% year-on-year, and that in the fourth quarter of 2015 decreased by 2.7%. Then, with the rise of crude oil prices, Russia's GDP has rebounded significantly. In the fourth quarter of 2016, GPD growth turned positive.
Economic diversity has a greater impact on the base currency than the absolute export figure. Colombia ranks 19th, but crude oil accounts for 25% of total exports, suggesting that the collapse of the Colombian Peso (COP) since mid-2014 shows a high dependence on crude oil. At the same time, the country's economy has cooled sharply after a round of rapid growth.
Crude oil is closely correlated with many currency pairs for three reasons. First of all, the contract is denominated in US dollars, so the price changes will have a direct impact on the relevant cross transactions. Secondly, the high dependence on crude oil exports has promoted the rise and fall trend of national economies in the energy market. Third, a sharp drop in crude oil prices will trigger a sharp fall in the prices of industrial commodities, increasing the threat of global deflation and forcing currency pairs to re price.