By Mark McCormick and Ilan Solot
NEW YORK (
BBH FX Strategy) -- In this piece, we look to analyze which currencies in the G10 are the most sensitive to oil prices and take a brief look at the policy implications following the roughly 12% increase in oil since early February.
First, it is important to note that while there are some differences between the correlation of WTI and Brent, for the most part, the correlations of both oil benchmarks are pretty tight on a short-term basis. Between the two, recent FX moves tend to be more closely related with moves in the WTI. But on a five-year horizon, currencies are more sensitive to changes in the Brent, perhaps due to the fact that Brent is more influenced by global factors.
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The currencies most closely correlated with oil prices are the AUD, NZD, CAD and NOK, respectively. Against WTI, the rolling 60-day percent change correlation suggests that the Canadian dollar has the strongest relationship with the change in crude oil (-0.57). Both the New Zealand dollar and the Australian dollar have nearly same statistical relationship to WTI, with the 60-day correlation around -0.50. Norway has the lowest correlation in the study with the 60-day rolling correlation against WTI around -0.40.
Counter-intuitively, the currency of the one country with the lowest correlation to oil amongst the four, Norway, is the one that has the strongest trade links to oil. In fact, Norway is both the largest oil exporter in G10 and has the largest share of total exports as a percent of GDP amongst the four countries mentioned above, according to OPEC's 2010-2011 Annual Statistical Bulletin. The relatively lower correlation is probably explained in part by how Norway treats its oil profits, where the fiscal spending rule aims to limit the use of oil revenues.