FX Research – Oil and Currencies

Good Morning!

v The oil situation looked a stretch a year ago but there is where we are now. With a further weakening of spot oil prices, the contango shape of the forward curve are becoming even more pronounced. Guided by historical pattern, we see good possibility a rebound in oil prices in next 12 months. 

v Based on our discussion with industry experts, current predicament in oil markets is predominantly supply-driven and that will serve a positive term of trade shock for a majority of global economy that will result in acceleration of money velocity.

v On this count, Asian currencies tend to depreciate by an average 18% in 12-month prior to peak in oil prices and to appreciate by an average 2.2% against US dollar in post peak in oil prices. This compared to developed market (DM) currencies, which tend to strengthen in prior and post-peak in oil prices.

v  Philippines Peso, Chinese Renminbi and Ringgit Malaysia will likely to be worst performing currencies in 12-month prior to peak in oil prices and to register least appreciation thereafter.