You’ll have noticed increased that Middle Eastern central banks have been even more visible in the markets in recent weeks than normal (and they are normally very active)…
That inspired me to take a look at the price of oil relative to the price action in EUR/USD.
It looks to me as if since the turn of the year the correlation between crude oil prices and the euro has strengthened.
The present environment is reminding me more and more of the spring and summer of 2008 when commodities exploded and the dollar traded to record lows.
The fundamental reason for the link? As OPEC countries export oil in dollars, they diversify a portion of their reserves into euros. Higher prices equals more dollars to diversify, pressuring EUR/USD higher…As the dollar falls, oil rises, prompting more diversification. A vicious or virtuous cycle, depending on your position.
The 2008 move proved to be a bubble, pricked by the global banking crisis that consumed Lehman Brothers. Perhaps Europe sovereign debt will be the catalyst this time, but that issue has been pushed to the back-burner, for the time being…
