Forex Markets Suggest More Pain at the Pump

From the Desk of Ian Culley @IanCulley

Petrocurrencies and crude oil futures are diverging.

The currencies that benefit most from higher oil prices refuse to roll with crude’s steady decline. 

Perhaps it’s more about the US dollar than a handful of currencies tied to oil’s supply and demand dynamic.

But with OPEC up to its old tricks again – Saudi Arabia announced deeper production cuts last weekend – the question arises…

Is crude oil due for a bounce?

Check out the overlay chart of our petrocurrency index and crude oil futures:

Crude oil posted a key pivot high a week after our index bottomed in late September. Since then, these markets have taken separate paths.

Yes, correlations tend to come and go. It’s the natural rhythm of the markets. Yet past divergences have ultimately corrected over time. 

Our currency index led crude off the bottom in early 2016. It also peaked well before the 2018 and 2022 tops in oil.

That doesn’t mean the forex market will lead crude at today’s juncture, of course, or that these markets will fall back in line next week.

I simply doubt these two charts continue to diverge over longer time frames.

Either crude prints a bullish reversal toward the series of higher highs and higher lows posted by the petrocurrency index (sounds like an uptrend), or these currencies catch lower toward further weakness in oil.

If it's the latter, global risk assets will likely contend with broad selling pressure spurred by a stronger dollar.

On the flip side, a rise in oil prices likely spills over to its derivatives – gasoline and heating oil – leading to higher prices at the pump this summer.

Currency markets suggest we give crude – and, by extension, energy – the benefit of the doubt.

I don’t want to ignore that information, especially considering energy’s resilience over the past year.

Stay tuned!

Thanks for reading.

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