The Relationship between Dollar/Euro and Crude Oil Price – Fact or Fiction? – 9th of November

There is an old paradigm among analysts about the relation between crude oil price and euro dollar rate: usually analysts quote the level of correlation between the two indexes and conclude that due to their high level of correlation assume a cause and effect relationship, i.e. one index affects the other (usually  the exchange rate affects petroleum price).

In order to check this hypothesis, it requires a detailed crude oil price analysis, more than this post can handle, however, herein I will review last month’s data about the main currencies including the euro dollar rate and their correlation with oil prices.

In the following graph are daily spot prices of main currencies (including Euro, Canadian dollar, Australian dollar and Yen) against the US dollar after indexing all of them to the 0% at the beginning of October along with the crude oil price in the same manner for the month of October.

crude oil price graph vs dollar cum oct 2010

crude oil price graph vs dollar cum oct 2010

It seems that there is not much of trend as oil prices made a small increase in the middle of the month and eventually settles back at a similar level in the beginning of the month. The same goes for the other currencies with the exception of the USD/Yen which show that the USD weakened compare to the Yen, more than other currencies.

It should be noted that I have included AUD and CAD because these two currencies are of economies that are heavily important in exporting crude oil to China (Australia) and US (Canada).

In the second and more important graph I present the percent change on a daily basis of each of the indexes.

crude oil price graph vs dollar perc change oct 2010

crude oil price graph vs dollar perc change oct 2010

When summing the data into a table that shows the level of correlation, one may notice that while there seems to be a high correlation between euro dollar rate and crude oil price, but there is a stronger correlation of daily percent changes among oil prices,  USD/AUD and USD/CAD.

What does it all mean?

For now, let’s just say that there is a correlation between the last two above mentioned exchange rates and the crude oil price; however we are still a long why from proving a cause and effect relationship. Also, since all currencies are related and correlated (e.g. the USD/EURO and USD/CAD have a 0.8 correlation in the daily percent change), it looks that it’s more likely that we should pay more attention to USD/AUD and USD/CAD than to USD/EURO when considering crude oil price.

crude oil price vs dollar corr  table oct 2010

crude oil price vs dollar corr table oct 2010