OPEC meeting poses downside risk for oil-related currencies - MUFG

Analysts at MUFG suggest that the OPEC meeting poses some downside risk for oil-related currencies heading into year end and anything short of a 9 month extension to production cuts could prompt an initial sharp reversal of recent strong gains for the price of oil.

Key Quotes

“For comparison, oil related currencies on the whole underperformed following the last OPEC meeting which disappointed expectations. The Russian rouble, Colombian peso, and Norwegian krone were amongst the worst performing global currencies between the 25th May and 21st June 2017. The Russian rouble, Colombian peso and Norwegian krone all declined against the US dollar during that period by -4.9%, -4.2%, and 1.5% respectively.”

“One exception was the Canadian dollar which outperformed despite the decline in the price of oil. The Canadian dollar strengthened by 1.2% against the US dollar supported both by an easing of NAFTA concerns and the hawkish repricing of BoC policy expectations.  In contrast, countries which rely more heavily on imported oil such as Turkey and India saw their currencies strengthen modestly by 1.9% and 0.6% respectively against the US dollar.”                  

“On this occasion the foreign exchange market could prove less sensitive to a potential reversal in the price of oil following next week’s OPEC meeting. The correlation between the performance of oil related currencies and the price of oil has weakened materially since the summer. Oil related currencies have been deriving less support than expected from the recent move higher in the price of oil.”

“The price of Brent has increased by around a fifth since the end of August yet the Canadian dollar, Colombian peso, and Norwegian krone have all declined against the US dollar by -2.0%, -0.5%, and -3.9% respectively. Only the Russian rouble has strengthened against the US dollar during this period but only marginally by 0.1%. Inversely it could imply that oil related currencies may not weaken much either if the price of oil corrected lower heading into year end.”

“If downside risks to the price of oil from the upcoming OPEC meeting fail to materialize and the price of oil remains at higher levels, we see scope for oil-related currencies to strengthen in the year ahead. We expect the price of Brent and WTI to average USD60/barrel and 55.8/barrel respectively in 2018. A more sustained move higher in the price of oil does not appear to be fully priced into oil related currencies at current levels. In particular, the weak performance of the Norwegian krone has diverged significantly from the higher price of oil in recent months. It leaves plenty of scope for the krone to rebound if domestic housing market concerns begin to ease.”