Pain at the pump, party on the foreign exchange market?

The sharp rise in the oil price this time seems to have less influence than usual on the currencies of various oil countries such as Canada, Norway and Russia.

For now, the higher price at the pump is not (yet) reflected in a rise in oil-related currencies. Until a few years ago, the exchange rate of the Canadian dollar, the Norwegian krone and the Russian ruble could be almost exactly over the price fluctuations of 1 barrel. Brent oil be laid.

However, that changed last year. Other factors began to play a decisive role in the currency markets. For example, the Russian central bank stopped buying foreign currencies in the autumn of 2018. This in an attempt to stop the free fall of its own currency. In Canada, local interest rate policy became more influential on the 'loonie', as the Canadian currency is also known.

Oil makes roller coaster ride
As a result, the rollercoaster ride of black gold over the past six months has had less of an impact on oil currencies than in the past. The price of 1 barrel of Brent oil fell from over $86 (October) to $50 (Christmas). Then bounce back above $70. That raises the question of why the price of petrol is close to record highs, while the price of oil is not yet close to the level of last fall.

This is partly due to the excise tax increase that was implemented at the start of this. In addition, the dollar has gained ground against the euro in recent weeks. Oil is traded in dollars, mainly so that the translation to cheaper euros accelerates the rally in the oil price. The dollar reached its highest level in nearly 25 years against the euro on Thursday, April 2.

This increase is mainly caused by the remarkably strong growth of the American economy in the first months of this year. The Fed As a result, (Federal Reserve) has no arguments for the time being to implement the interest rate cut, which currency traders had already priced in for 2019.

Petrol price on the rise
As long as the US economy continues to grow and inflation is low, the Fed will not tinker with interest rates. That was the clear message from Chairman Jerome Powell after the meeting on Wednesday, May 1. As a result, the dollar is still on the rise, but it is doubtful whether the underlying increase in the oil price will also continue.

The recent rally is partly the result of supply cuts caused by a revolution in Venezuela, tougher US sanctions on Iran and fighting in Libya. It is rare for so many factors to temporarily disrupt the supply of oil. In the past, a combination of circumstances often did not last long. For the time being, therefore, no fireworks should be expected from oil currencies.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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