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Clarifying the dollar’s upside and oil’s downside – J P Morgan

FXStreet (Barcelona) - John Normand of J.P.Morgan Group comments on the Dollar-Oil relationship stating that FX and Oil are not two sides of the same coin given the role of supply in crude’s collapse.

Key Quotes

“We’ve also described the dollar’s move as an overshoot on standard measures, but one we are comfortable buying into as long as US data momentum persists and the Fed remains dismissive of feedback loops. So this week there is no change to the long USD and long volatility strategy we have held since August. The focus instead is on clarifying the dollar's upside and oil's downside, since these two points arise in most client discussions. FX and oil are not two sides of the same coin given the role supply plays in crude's collapse”

“There is always risk of circular reasoning when examining commodity and currency markets side by side, since the former are priced in dollars. More of the value comes from recognising when significant gaps open between the two – like a currency trading much stronger than underlying commodity prices or the terms of trade – or when commodity prices are moving on physical factors like a supply increase.”

“Another option is to acknowledge that the Fed outlook is so well discounted in FX – maybe because owning USD vs JPY and EUR is perceived to be an easier and cheaper trade than shorting Treasuries when the BoJ and ECB are easing – that US rates could move higher in coming months while the dollar index trades a range.”

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