The recession, which started during 2008, in the US and later on spread to Europe and other major countries, have had an effect on the correlations among crude oil price and major currencies.
I will show in this short analysis the relations among major currencies and US dollar to petroleum price (WTI), by presenting the correlations of these indexes’ month to month percent changes during 2010.
Further, I will show the correlation between US dollar euro rate (EUR/USD) and crude oil price month to month percent changes over the last decade (1999-2010).
These data will confirm two things that are usually assumed in the market:
- There is a strong correlation in 2010 among crude oil price and Canada dollar/US dollar; Australian dollar/ US dollar; Indian rupee/US dollar;
- There is an upward trend in recent years in the correlation between the US dollar euro rate and crude oil price.
2010 correlations among currencies and oil
The following chart presents the relations of major currencies during 2010 to crude oil price:
The chart shows that the EURO/US dollar showed a strong correlation to crude oil price with 0.51%. Thus as the US dollar weaken against the Euro, on average, nearly half the time (on a monthly scale) crude oil price strengthen during 2010.
The same could be said about Canadian dollar and US dollar, but only with a stronger correlation of -0.86, i.e. as the US dollar weaken against the Canadian dollar, on average, nearly 86% the time (on a monthly scale) crude oil price strengthen during 2010.
The strong correlations to USD/CAD and AUD/USD are mainly since these countries are major exporters of crude oil, and Canada is one of the biggest exporters of petroleum to the US.
In regards to the strong correlation between the Indian Rupee /USD and crude oil price, is probably due to an indirect relation: India is a major exporter of service to the US (e.g. call centers in Bangalore) on the one hand, and India’s growth relates to its ongoing rise in demand for crude oil on the one hand, these two effects probably contributed to this strong correlation.
US dollar euro rate and crude oil price 1999-2010
Let’s finally see the correlation between the EURO/Dollar and crude oil price, percent monthly changes of the years 1999-2010:
The chart shows that since 2005 there is a rise in the level of correlation as crude oil price gets more correlated and in sync with EURO/USD. This could show that the changes in crude oil price are more than in the past relate to the US dollar and to its weakening in recent years.
It could also be part of the movement of many investments to major commodities from dollar based investments, as a ripple effect of the 2008 recession.
Therefore, in order to understand the changes in the energy markets we should also pay attention, more today than before, to the US dollar and it’s fluctuations against major currencies.
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