FxWirePro: What’s cooking in commodity-currency bloc?

Instead of policy news, the more notable development this week was the sharp acceleration in the ongoing oil price rally, which puts a spotlight on not only a large and growing deviation between oil prices and petro FX but a general decorrelation between commodity prices and FX over at least the past couple of months. This week’s outlook looks more closely at this phenomenon making the following conclusions:

1) Commodity FX decorrelations may be significant or may be ordinary, depending on the macro and idiosyncratic context.

2) With a dynamic US dollar and yield backdrop, expressing commodity oriented FX views are better expressed as relative-value crosses rather than outright vs the USD, and

3) If the next leg of the commodity price rally is driven by supply shock risks, then the sensitivity and reaction of commodity FX may shift again.

An ongoing breakout in Brent could present interesting opportunities in at least some petro currencies: we highlight recent recommendations from us and our EM colleagues in longs or overweights in CAD, COP, and MYR.

The week was marked by a wobble in global risk sentiment, which coincided with weakness in crude oil prices. Nervousness about whether OPEC might be able to craft an extension of the output cut agreement in the meeting later this month weighed on oil prices. This dragged down the commodity-linked currencies, with NZD leading the pack after stops in the low 0.68s were triggered on Friday. In fact, NOK, NZD, and AUD were the worst performers in our sample this week. On the flipside, the euro and yen gained as US bond yields dropped, with the yen being buoyed by nervous risk sentiment.