FX Daily Analysis

All the focus is on who gains from Oil price gains, but what about importing nations.

Market focus when Oil prices go on the tear - or reverse sharply - tends to veer towards the producers and their respective currencies, and in the majors, the Canadian Dollar suffered incredibly during the fallout out seen in early 2016.  Fast forward today, and the CAD has a different set of problems, which has elevated the USD rate back into the mid 1.3000's, though we are still a far cry from the heady heights seen through 1.4500 at the time.  Canada's economy has failed to respond to the recent price rises however, due solely to pipeline disruptions which have limited volumes.  

However, on the other side of the equation, importing nations have had mixed reactions, though perhaps no surprise given top of the list is the US who is also a producer, and is still looking to expand through shale and China's - the manufacturing hub of the world.  In 2016, the drop in Oil price set off a significant bout of risk aversion due to over-supply and diminished demand, and the consequences are not too far back to remember, but in short, investors ran for safety and the usual suspects - JPY and CHF in currency world - naturally gained.  Europe was still knee deep in its QE phase and at the time, the doom-mongers were calling for a move to parity, but as 2017 got under way, it was clear that we were not going to get there.  As a region, the EU is the major importer of Oil, with Germany along importing some $36bln of Crude through 2017, compared to Japan's $63bln as the worlds fourth largest importer - behind India.   

Since then, inflation has become an anathema to central bankers, who have used vast sums of quantitative easing to try and re-inflate the global economy.  The Fed struggled to find reasons why accommodative policy had failed to generate price growth, but with the help of some notable USD weakness - especially through the early part of this year - CPI levels are now picking up, but more importantly at the core. 

In contrast, the ECB consistently, yet as subtly as possible, warned that exchange rate strength could derail growth (both real and price), and this is exactly what has come to pass, though now looks to have turned again with the EUR vs USD exchange rate significantly lower.  From hereon out however, there are clear headwinds from the gains in Oil.  Price competitiveness is at its peak - and we saw this when UK goods were in demand after the post EU referendum sell off in GBP - and when input costs are rising as they are, rising inflation becomes a different animal altogether.  

We can only see repatriation flow as the major aide to a EUR recovery in the current climate, with market positioning largely flat, or at least significantly reduced to levels seen earlier in the year.  Rather than join the chorus of shouts to sell against the USD, we would be inclined to view some of the EUR moves in line with Oil price where WTI looks to have designs on $80.  President Trump has requested that the Saudis raise production to bring back prices and we would wager that EU officials would like to do other wise.  Oil price at current levels and at a higher USD price will be hurting producers and exporters across the region, and today's higher than expected producer prices paid testament to that - up 0.8% in May vs +0.5% in the previous month. US economy chugging ahead for now, though USD staying away from the recent highs.