Will Currencies Confirm the Rally in Crude?

From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley

Crude oil has stolen the show, as it’s up more than 28% from its August lows.

What started as a questionable breakout has turned into a full-fledged rally -- and the broader market seems to agree.

Copper retested its all-time highs last week, interest rates are on the rise across the curve, and cyclical stocks have become leaders.

All of these events fit neatly in an environment where crude oil prices continue higher.

But what does the currency market have to say about the recent strength from black gold?

Let’s look at our Petrocurrency Index for clues, along with one forex pair that's showing strength against the US dollar.

First, we have our Petrocurrency Index overlaid with crude oil futures:

At first glance, these charts look incredibly similar. But there is one glaring difference at the end of the chart -- a lack of new highs in the Petrocurrency Index.

While the index continues to make a series of higher lows, it has yet to reclaim its highs from earlier this year. This is due mainly to weakness in the Brazilian real and the range-bound nature of the USD/MXN cross. 

Regardless of what’s holding it back, we want to see this index break above its year-to-date highs and confirm the price action in crude.

Here’s one petrocurrency that is leading the charge -- the Russian ruble:

Earlier this month, the USD/RUB violated key pivot lows and followed through to the downside. As long as it’s below 72.65, the bias is lower and we’re targeting the 2019 highs around 67.10.

Seeing energy-sensitive currencies gain against the dollar like this is supportive of higher prices for crude oil.

This leaves us with a bigger question: Will we see similar strength from other oil-producing emerging and developed market currencies?

Developed currencies like the Canadian dollar and the Norwegian krone have already started to assert their dominance. But we want to see broad strength reflected in our petrocurrency index, which will require participation from the EM currencies.

We’ll continue to update you on our index along with any developments in the USD/MXN, USD/BRL, and/or other currencies that might give us information regarding the future direction of crude oil. Stay tuned!

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