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Implications of lower Oil prices on FX – SG

FXStreet (Barcelona) - Sebastien Galy, of Societe Generale, lists down the implications of falling Oil prices on the Currencies.

Key Quotes

“Lower oil prices should benefit the USD as foreign investors bet on the US consumer via equities, and US Treasuries are increasingly bought by EM central banks intervening aggressively to preserve their competitiveness. While exporters stand to benefit, Canada will be the main developed economy to gain thanks to its proximity to the US.”

“CAD/NOK should outperform if oil continues to fall lower”

“While oil has a large impact on NOK, CAD and the currencies of other commodity producers over the long term, it is difficult to capture this important relationship even at a quarterly frequency as it is quite loose.”

“We do find clear evidence for NOK while the evidence is much weaker for CAD as it seems more driven by rate differentials over any quarter as is the case for USD/JPY.“

“Empirically, EUR/USD tends to rise with higher oil prices. As both the ECB and the Fed tend to tighten policy a bit and the rates differential is not the main mover of EUR/USD. It seems mostly a function of diversification out of the USD into EUR as OPEC foreign reserves grow. It may also possibly be as a result of trade deficit fears as the US was a large oil importer. In any case with the ECB’s negative interest rates and the US becoming an energy exporter, these results are antiquated.”

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