Mitul Kotecha – Senior Emerging Markets Strategist at TD Securities (TDS) – offered his take on the impact of rallying Oil prices on emerging market (EM) currencies. It is worth mentioning that Oil prices surged around 20% intraday on Monday in reaction to a drone strikes on the world’s largest crude-processing facilities in Saudi Arabia, which knocked out more than 5% of global oil supply.
“While it is unclear how long the spike in oil prices will be sustained given slowing demand and strategic inventory releases, we examine historical periods (6 in total) of oil price increases (annualised gains of 200% since the start of 2015) to ascertain the potential impact on EM currencies.”
“EM FX in general benefits from higher oil prices. RUB, COP and MXN are the main beneficiaries while most Asian currencies, with the exceptions of SGD and to a lesser extent IDR, suffer as oil prices increase. INR loses most ground against the USD. Long Latam vs. Asia FX basket favoured as oil spikes.”
“Another imponderable is risk aversion. If risk appetite collapses due to fears of worsening middle east tensions in the wake of any retaliation to the drone attacks, some EM’s could face a double whammy of pressures. In Asia, the most risk-sensitive currencies are INR, IDR and PHP.”