Some breakups just aren’t meant to last.
That’s what currency strategists are saying about the split between the price of oil and money in some of the world’s largest crude-exporting nations. The Canadian dollar, the Russian ruble and the Colombian peso count among global leaders in the foreign exchange market this year, wreaking havoc on correlations with Brent crude after the world’s oil benchmark tumbled as much as 8 percent. The ruble’s link fell to near the lowest level in 19 months and the loonie’s to its weakest since early 2015.
“Can this continue? Probably not,” said Viraj Patel, a London-based currency strategist at ING Bank NV. “There will be a bit of a correction and re-coupling between oil and petro currencies.”
The cooling off comes as Donald Trump’s unorthodox approach to policy proclamations roils global financial markets on a near-daily basis, easing the lockstep moves among assets that have characterized markets in recent years. Patel says the makeup period will start once a selloff in bonds that’s fueled risk appetite eases and investors resume trading petro currencies more on oil’s price.
The rout in sovereign bonds was sparked by speculation that the incoming president would lift U.S. government spending. Normally, rising U.S. inflation odds and a drop in oil provide a recipe for losses in most petro-currencies. Not so since the election, the analyst said.
“The bigger theme for FX in the past few months has been the bearish correction in bond markets,” Patel said in an interview with Bloomberg. “The petro currencies are not as sensitive to rising U.S. yields as other currencies.”
At the same time, Trump’s win sparked a broader advance in riskier assets, leaving some investors willing to place bets that high-yielding currencies have room to run. And with the Canadian dollar, what’s good for the U.S. is ultimately good north of the border as more than 70 percent of their exports go south.
Signs that oil and petro currencies are rekindling their relationship emerged this week, as crude advanced and the bond rout eased after Trump comments failed to elucidate his spending priorities.
Still, the relationship might not be as tight as it once was, especially if crude holds above $50 a barrel, said Jim Craige, who oversees $40 billion as money manager at Stone Harbor Investment Partners.
“The re-pricing in the market after the election was significant and you have some big high yielders doing well, but it’s not like they’re doing ‘that’ well,” he said.