Fundamental analysis Market interconnections

WTI Impact on the US Dollar and Other Currencies

Elena Berseneva 02 march 2022 154 3

Today, oil is the critical raw material, and oil prices are the subject of both professional traders and general public focus. Oil prices definitely affect the global economy as a whole, the political situation in separate countries and regions, the exchange rate and, hence, the national standard of living.


The main world benchmark crudes are:

  • Brent Blend is a North Sea light crude oil. Brent price is a leading benchmark price for almost 70 % of all world grades, mostly in the European and Asian regions.
  • WTI (West Texas Intermediate) is an American light, sweet benchmark crude amongst other oil grades in the US and the Western Hemisphere.
  • Dubai Crude is a benchmark extracted from Dubai and exported to the Middle East and Asia-Pacific region.
  • Urals is the Russian benchmark crude. All of Russia’s oil exports belong to this grade. Urals is a mixture of light and heavy grades of oil, inferior in basic characteristics to the world standards.


Brent and WTI are the leaders in the global economy rate. These grades are similar in composition and price settlement.


Shale production has rapidly increased in recent years, so it led to the steady discount of the American WTI oil grade to the Brent one. Plus, the Brent-WTI spread is being fluctuated depending on the global oil market situation, but it continues to be positive.

 

In this article, we analyze how changes in WTI crude oil price influence the US dollar and other major world currency rates.

Hypothesis
To conclusion

As WTI crude oil prices rise, the US dollar gets lower, exchange rates of oil-exporting countries strengthen, and exchange rates of oil-importing countries weaken.

To conclusion
Data used

The currencies analyzed:

  • The U.S. dollar (USD);
  • The Japanese yen (JPY);
  • The Euro (EUR);
  • The Canadian dollar (CAD);
  • The British Pound Sterling (GBP);
  • The Australian dollar (AUD);
  • The Russian ruble (RUB).



Historical data:


Period: March 1983 – November 2019 (37 years).

Timeframe: D1.

Total: 286,378 values.


Period: January 2006 – November 2019 (14 years)

Timeframe: H1.

Total: 608,499 values.


Currency pairs formed:

  • USDCAD
  • USDJPY
  • AUDUSD
  • EURUSD
  • GBPUSD
  • CADJPY
  • EURCAD
  • EURGBP
  • EURAUD
  • EURJPY
  • GBPJPY
  • AUDJPY
  • GBPCAD
  • GBPAUD
  • AUDCAD
  • EURRUB
  • USDRUB


We use temporary fluctuations of quotations to reveal the trends and analyze the way changes in WTI crude oil prices influence the change in quotation currency for today (same day /same hour), the next day (hour) and 3 days (hours) by calculating correlation coefficients.



Analysis of the results  


The results are shown in the tables below.

 


1-day timeframe (D1)

 

Correlation coefficient between WTI price movement and simultaneous changes in currency pair rates


CURRENCIES
Quoted currency
USD
AUD
GBP
EUR
JPY
CAD
RUB
Base currency
USD
-0.20
-0.10
-0.08
0.05
-0.25
-0.32
AUD
0.20
0.11
0.13
0.19
0.05
GBP
0.10
-0.11
0.01
0.12
-0.08
EUR
0.08
-0.13
-0.01
0.12
-0.09
-0.06
JPY
-0.05
-0.19
-0.12
-0.12
-0.18
CAD
0.25
-0.05
0.08
0.09
0.18
RUB
0.32
0.06



The 1-day-shift correlation coefficient between WTI price movement and changes in currency pair rates


CURRENCIES
Quoted currency
USD
AUD
GBP
EUR
JPY
CAD
RUB
Base currency
USD
-0.02
0.01
0.02
0.03
-0.01
0.04
AUD
0.02
0.02
0.03
0.03
0.01
GBP
-0.01
-0.02
0.01
0.02
-0.02
EUR
-0.02
-0.03
-0.01
0.01
-0.03
0.01
JPY
-0.03
-0.03
-0.02
-0.01
-0.03
CAD
0.01
-0.01
0.02
0.03
0.03
RUB
-0.04
-0.01



The 3-days-shift correlation coefficient between WTI price movement and changes in currency pair rates


CURRENCIES
Quoted currency
USD
AUD
GBP
EUR
JPY
CAD
RUB
Base currency
USD
0.00
-0.01
-0.01
0.00
0.00
0.00
AUD
0.00
-0.01
-0.01
-0.01
-0.01
GBP
0.01
0.01
0.00
0.00
0.00
EUR
0.01
0.01
0.00
0.00
0.00
0.01
JPY
0.00
0.01
0.00
0.00
0.00
CAD
0.00
0.01
0.00
0.00
0.00
RUB
0.00
-0.01



The 1-day-shift correlation coefficient between changes in currency pair rates and WTI price movement


CURRENCIES
Quoted currency
USD
AUD
GBP
EUR
JPY
CAD
RUB
Base currency
USD
0.02
-0.01
0.01
-0.03
0.01
-0.06
AUD
-0.02
-0.02
-0.02
-0.03
-0.02
GBP
0.01
0.02
0.00
-0.01
0.01
EUR
-0.01
0.02
0.00
-0.02
0.00
-0.01
JPY
0.03
0.03
0.01
0.02
0.02
CAD
-0.01
0.02
-0.01
0.00
-0.02
RUB
0.06
0.01



The 3 days-shift correlation coefficient between changes in currency pair rates and WTI price movement


CURRENCIES
Quoted currency
USD
AUD
GBP
EUR
JPY
CAD
RUB
Base currency
USD
-0.02
-0.02
-0.02
0.00
-0.02
-0.01
AUD
0.02
0.01
0.01
0.02
0.01
GBP
0.02
-0.01
0.00
0.01
0.01
EUR
0.02
-0.01
0.00
0.01
0.01
0.01
JPY
0.00
-0.02
-0.01
-0.01
-0.01
CAD
0.02
-0.01
-0.01
-0.01
0.01
RUB
0.01
-0.01




1-hour timeframe (Н1)


Correlation coefficient between WTI price movement and simultaneous changes in currency pair rates


CURRENCIES
Quoted currency
USD
AUD
GBP
EUR
JPY
CAD
RUB
Base currency
USD
-0.10
-0.03
-0.03
0.06
-0.10
-0.22
AUD
0.10
0.07
0.09
0.12
-0.01
GBP
0.03
-0.07
0.04
0.14
-0.09
EUR
0.03
-0.09
-0.04
0.10
-0.12
-0.33
JPY
-0.06
-0.12
-0.14
-0.10
-0.17
CAD
0.10
0.01
0.09
0.12
0.17
RUB
0.22
0.33



The 1-hour-shift correlation coefficient between WTI price movement and changes in currency pair rates


CURRENCIES
Quoted currency
USD
AUD
GBP
EUR
JPY
CAD
RUB
Base currency
USD
-0.01
0.00
0.00
0.00
-0.01
-0.01
AUD
0.01
0.00
0.00
0.00
0.00
GBP
0.00
0.00
0.01
0.00
-0.01
EUR
0.00
0.00
-0.01
-0.01
-0.01
0.00
JPY
0.00
0.00
0.00
0.01
0.00
CAD
0.01
0.00
0.01
0.01
0.00
RUB
0.01
0.00



The 3-hours-shift correlation coefficient between WTI price movement and changes in currency pair rates


CURRENCIES
Quoted currency
USD
AUD
GBP
EUR
JPY
CAD
RUB
Base currency
USD
0.00
-0.01
0.00
-0.02
0.00
-0.01
AUD
0.00
0.00
0.01
0.00
0.01
GBP
0.01
0.00
-0.01
-0.01
0.01
EUR
0.00
-0.01
0.01
0.00
0.00
0.00
JPY
0.02
0.00
0.01
0.00
0.00
CAD
0.00
-0.01
-0.01
0.00
0.00
RUB
0.01
0.00



The 1-hour correlation coefficient between changes in currency pair rates and WTI price movement


CURRENCIES
Quoted currency
USD
AUD
GBP
EUR
JPY
CAD
RUB
Base currency
USD
-0.02
-0.03
-0.03
0.00
-0.02
-0.03
AUD
0.02
-0.02
0.01
0.02
0.00
GBP
0.03
0.02
-0.01
0.04
-0.02
EUR
0.03
-0.01
0.01
0.01
-0.02
-0.04
JPY
0.00
-0.02
-0.04
-0.01
-0.03
CAD
0.02
0.00
0.02
0.02
0.03
RUB
0.03
0.04



The 3-hours- shift correlation coefficient between changes in currency pair rates and WTI price movement


CURRENCIES
Quoted currency
USD
AUD
GBP
EUR
JPY
CAD
RUB
Base currency
USD
-0.02
-0.01
-0.03
0.02
-0.02
-0.03
AUD
0.02
0.03
0.01
0.03
0.00
GBP
0.01
-0.03
0.00
-0.01
-0.01
EUR
0.03
-0.01
0.00
0.02
0.00
0.00
JPY
-0.02
-0.03
0.01
-0.02
-0.02
CAD
0.02
0.00
0.01
0.00
0.02
RUB
0.03
0.00



Overall, the correlation coefficients between changes in WTI prices and the US dollar to the Japanese yen exchange rates in the numerator are negative. The correlation coefficients between changes in WTI prices and the US dollar to the Japanese yen exchange rates are next to 0. So, there is an inverse correlation between changes in WTI prices, the US dollar and the Japanese yen exchange rates (same day / same hour).


The correlation coefficients between changes in WTI prices and the currency pair rates including the Australian dollar(AUD), Canadian dollar(CAD) and Russian ruble (RUB) in the numerator are positive. The correlation coefficients between changes in WTI prices and the AUD to the CAD exchange rate are next to 0.  In other words, a direct correlation between changes in WTI prices and AUD, CAD and RUB exchange rates ( same day/same hour). has been observed.

 

As a result, it signals about lack of correlation between changes in WTI prices and 1 or 3 day(s) / hour(s) movements of major world's currency rates, since the correlation coefficients are next to 0.



Let us explain the revealed correlations.


WTI and the US dollar (USD)

 

According to the law of purchasing power, the US dollar must be inversely proportional to oil prices. The USA is the oil production country which consumes a large amount of gasoline, diesel, and fuel oil. Hence, the American currency is negatively correlated with the oil price due to its increase. So, if the oil price rises, direct quote (the dollar in the denominator) grows then.



WTI and the Japanese yen (JPY)

 

Japan is an energy-dependent country as it lacks its indigenous energy resources. In general, the country imports oil from the Middle Eastern countries. The Japanese oil industry is primarily dependent on import (about 90%), so the rise in oil prices weakens the Japanese yen. Although Japan does not import WTI crude oil, the Japanese yen exchange rate fluctuates with oil price movements because of the close correlation among all the oil grades supplied on the world market.

 


WTI and the Canadian dollar (CAD)

 

Canada is in the "Black Gold Mafia" list. The country exports oil as the oil volume produced on its territory is insufficient for using. Thus, the decline in oil prices causes the lower demand for the Canadian dollar and its decreasing rate, and vice versa.



WTI and the Australian dollar (AUD)

 

The commodity currencies are featured with the national economy dependence on the export of certain raw materials. For example, Australia exports gold.

 

Gold and oil have always gone hand-in-hand on the stock market. Their correlation has been established for decades. 


The correlation between oil and gold was founded over half a century ago:

  • At that time, oil and gold prices were moving together. The correlation between oil and gold was positive and made up 80% .
  • In the mid twentieth the oil and gold prices were stable. In the 70s a sharp rise in asset prices was resulted from floating exchange rate.
  • In 2003 and 2008 there was a drastic oil and gold price leap. The assets value ratio remained constant though.

 

Such kind of fluctuations confirms a direct correlation of assets value.  Namely, the Australian dollar is positively correlated with the oil and gold prices. If the oil price goes up, the Australian dollar rises either.




In conclusion, we rate currency pairs in descending order of the strong correlation between changes in pair's exchange rates and WTI prices:


No
Currency pair
Correlation
coefficient (D1)
Direction of correlation
Currency pair
Correlation
coefficient (H1)
Direction of correlation
1
USDRUB
-0.32
Inverse
EURRUB
-0.33
Inverse
2
USDCAD
-0.25
Inverse
USDRUB
-0.22
Inverse
3
AUDUSD
0.19
Direct
CADJPY
0.17
Direct
4
AUDJPY
0.18
Direct
GBPJPY
0.14
Direct
5
CADJPY
0.18
Direct
AUDJPY
0.12
Direct
Conclusion

If WTI price rises:

  • US dollar exchange rate gets lower.
  • Japan exchange rate gets lower (oil-importing country)
  • Canada and Russia exchange rates (oil-exporting countries) get higher.


Thus, we haven’t been able to establish any temporary shift correlation between WTI crude oil prices and major currency pairs.

Detailed results are shown in the Appendix:

XLSX (0.02 MB)Impact of WTI on the US dollar and other currencies.xlsx

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