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Deutsche Bank
Markets Research
Global

Foreign Exchange
FX Spot

Date
13 January 2014

FX Daily
FX implications of lower oil prices



If DB’s forecast of lower oil prices materializes, this will provide further
support for our stronger USD view. The Fed has tightened policy the
year after the last 4 favorable ‘exogenous’ oil shocks.
Historic
precedent fits with current circumstances where lower oil prices help
risky assets and the real economic recovery, such that initial Fed
accommodation gives way to Fed tightening and a broadening of USD
strength.

DB is forecasting a decline in WTI to $85/barrel by the end of Q2 2014, which
is one hint that asset and FX specific implications of a favorable oil supply
shock warrant consideration.
Table 1: Real economy and financial indicators in key years (in blue) when oil prices fell sharply
1983

1984

1985

1986

1987

1992

1993

1994

1996

1997

1998

1999

Average
1983-2012

29.6
-7.1

26.4
-10.8

26.3
-0.4

17.9
-31.8

16.7
-6.6

19.5
1.8

14.2
-27.2

17.8
25.3

25.3
30.3

17.6
-30.4

11.8
-33.1

25.7
118.2

37.7
9.2

4.6
2.7
3.8
4.7
9.8

7.3
4.8
4.0
4.9
7.8

4.2
3.8
3.8
4.3
8.0

3.5
2.9
1.2
3.8
8.3

3.5
3.4
4.3
4.2
10.5

3.6
2.1
3.0
3.4
5.3

2.7
1.4
2.8
3.1
4.9

4.0
3.0
2.6
2.6
5.2

3.8
2.9
3.4
2.6
4.9

4.5
3.7
1.7
2.3
4.8

4.5
2.7
1.6
2.5
4.2

4.8
3.4
2.7
1.9
3.6

3.0
2.5
2.9
2.9
4.6

11.8
13.5
-1.3
-14.5
JPY
EUR

14.9
16.4
8.6
-14.3
USD
NZD

-18.5
-0.2
-20.4
25.3
EUR
AUD

-16.1
-4.0
-21.4
20.9
CHF
AUD

-17.5
-6.1
-23.2
22.2
JPY
USD

10.6
9.1
0.0
-9.9
USD
SEK

4.9
8.2
-10.4
-7.6
JPY
SEK

-8.4
5.2
-10.8
10.2
NZD
CAD

4.0
3.5
12.1
-1.9
GBP
CHF

13.0
13.5
12.7
-12.3
USD
AUD

-5.5
1.8
-13.3
6.7
JPY
NZD

8.2
1.0
-9.7
-14.1
JPY
EUR

-0.8
2.6
-2.6
1.7
N/A
N/A

Fed funds target rate
8.0
Fed funds target rate change in bps
0
10 yr yield
11.8
10 yr yield change in bps
146
BAA-10 yr yield spread
1.9
BAA-10 yr yield spread change in bp -185.0
Equities
S&P 500 YoY % change
17.3
MSCI World Index YoY % change
18.6
Commodities
CRB Industrials Index YoY % change -0.4
Gold Spot YoY % change
-16.5

8.1
13
11.6
-27
1.9
-8.0

7.8
-38
9.0
-255
2.6
73.0

6.0
-175
7.2
-177
2.7
16.0

6.8
81
8.8
160
2.5
-28.4

3.0
-100
6.7
-1
2.1
-44.1

3.0
0
5.8
-90
1.9
-22.2

5.5
250
7.8
203
1.3
-62.0

5.3
-25
6.4
84
1.5
-44.3

5.5
25
5.7
-69
1.6
11.8

4.8
-75
4.6
-108
2.6
99.2

5.5
75
6.4
179
1.7
-83.4

4.3
-26
5.9
-29
2.4
-3.0

1.4
1.8

26.3
37.0

14.6
39.1

2.0
14.3

4.5
-7.1

7.1
20.4

-1.5
3.4

20.3
11.7

31.0
14.2

26.7
22.8

19.5
23.6

9.4
9.2

-12.9
-19.2

-2.4
6.1

-0.6
19.5

20.0
23.8

4.2
-5.4

11.2
17.4

10.0
-2.3

2.1
-4.6

-22.2
-21.7

-12.1
-0.3

4.1
0.0

5.2
5.5

(Values as of end of period)
Oil
Oil Spot
Oil Spot YoY % change
Real Economy Indicators
US Real GDP YoY % change
OECD Real GDP YoY % change
US CPI YoY % change
US Core CPI YoY % change
OECD Core CPI YoY % change
Financial Indicators
Currencies

DXY Index YoY % change
USD TWI broad YoY % change
USD/JPY YoY % change
EUR/USD YoY % change
Strongest G10 currency
Weakest G10 currency
Interest rates

Source: Deutsche Bank, EcoWin, Bloomberg LP

________________________________________________________________________________________________________________
Deutsche Bank Securities Inc.

13 January 2014
FX Daily: Lower oil prices: FX & asset market implications

While it is well known that a sharp increase in oil prices has preceded each of
the last six US recessions, like the dark side of the moon, what happens to the
US economy and key asset prices when oil prices decline is comparative virgin
terrain. Table 1 examines 4 episodes (1984, 1986, 1993, and 1997-1998)
where oil prices declined sharply, and this decline was not provoked by a
major US slowdown. 1986 is perhaps ‘the cleanest’ data, where excess supply
was dominant. In 1984, USD strength was a major oil price depressant in USD
terms. 1993 was partly a post Gulf War 1 response; and, 1997-8 included weak
Asian growth.
Past experiences of ‘favorable’ oil shocks
Table 1 above, looks at the annual change of relevant economic and financial
variables in the year before, the year of, and the year after these ‘exogenous’
(for the US) oil price declines.
On the real economy, there are obviously a multitude of factors impacting
growth and inflation, making it difficult to extract the oil price impact alone.
Nonetheless, a broad sweep of the data suggests:
1.

Growth was almost always at, or more often above trend, in the year
of and the year after the favorable oil shock.

2.

Core inflation went down marginally; total inflation inclusive of energy
prices not surprisingly fell more substantially.

3.

The mix of strong growth, with subdued inflation resulted in modest
declines in US 10 year yields.

4.

US credit spreads did not do a whole lot.

5.

Global equity indices were up sharply (well above the 9% 30yr annual
average for the World MSCI), while US equities typically also had
above average years.

6.

There was no clear pattern to gold’s performance. Outside 1993, CRB
industrials tended to follow oil prices down, a poor performance in the
context of US and global growth.

Policy accommodation
The extent to which the above variables react to softer oil prices was in no
small part a function of how the Fed and other policymakers responded to the
disinflationary forces. In 1986 the Fed cut rates. In 1993 the fed funds rate
remained at a cyclical nadir of 3%. In 1997-98, contained inflation allowed the
Fed to cut rates in the face of solid US growth to offset equity volatility
inspired by the Asia crisis. The past experience has then typically been one of
the Fed responding to softer oil prices with at least some accommodation that
supported asset prices, and furthered the divergence in asset and goods
inflation.
For the global economy, there are already elements of these forces at work.
China has played a disinflationary role for non-oil commodity prices in 2012–3.
A decline in oil prices will add to pre-existing disinflationary forces,
encouraging monetary policy complacency. Oil price declines tend to prolong a
favorable risk environment especially for the risky assets of net oil importers.
A policy accommodated decline in oil prices adds to the amplitude of the asset
cycle, initially on the upside, and eventually on the downside.

Page 2

Deutsche Bank Securities Inc.

13 January 2014
FX Daily: Lower oil prices: FX & asset market implications

Figure 1: Relative FX performance in key years when oil prices fell sharply

Best performers vs
USD

Worst performers
vs USD

1984

1986

1993

1997

1998

USD
0.0%

CHF
27.6%

JPY
11.6%

USD
0.0%

JPY
15.4%

CAD
-5.8%

EUR
27.2%

NZD
8.8%

GBP
-3.8%

EUR
7.4%

JPY
-7.9%

JPY
27.2%

USD
0.0%

CAD
-4.1%

CHF
6.4%

AUD
-8.0%

SEK
11.1%

CHF
-1.4%

CHF
-8.2%

GBP
0.4%

SEK
-10.9%

NZD
6.0%

AUD
-1.5%

JPY
-11.3%

USD
0.0%

EUR
-13.6%

NOK
2.8%

GBP
-2.7%

NOK
-12.6%

SEK
-2.2%

NOK
-15.2%

GBP
2.6%

CAD
-3.8%

SEK
-13.7%

NOK
-3.4%

CHF
-16.2%

CAD
1.3%

EUR
-6.9%

EUR
-13.9%

AUD
-6.0%

GBP
-20.2%

USD
0.0%

NOK
-7.8%

NZD
-17.7%

CAD
-6.6%

NZD
-27.3%

AUD
-2.4%

SEK
-15.1%

AUD
-18.1%

NZD
-9.5%

Source: Deutsche Bank, EcoWin

What history says about FX implications:
The simple currency performance rankings (Figure 1 above) for these key oil
years is helpful in this regard and shows:
1.

The USD has typically done well, with the notable exception of 1986.

2.

The EUR performance in years when oil prices decline errs on the
softer side. One view is that the DEM traded well on higher oil prices
because of the BBK’s relative sensitivity to total inflation compared to
other Central Banks’ focus on core inflation. The corollary would
explain some tendency for the DEM to underperform in periods where
oil prices are soft. In current circumstances where a small decline in
EUR headline inflation to 0.5% or below, could provoke QE or negative
depo rates, oil has particular scope to be negative for the EUR.

3.

As an example of relative performance, the USD has always done
better than the Aussie. The poor Aussie performance partly relates to
the tendency for industrial commodities to also underperform in years
of oil price declines.

4.

Similarly, the yen was always near the top of the above FX league
tables, which of course fits with perceptions of Japan’s dependence
on oil imports. Figure 2 below however suggests that Japan’s energy
efficiency means it is less a beneficiary of lower oil prices than
commonly assumed.

5.

AUD/JPY has typically gone down, in years when oil prices have gone
down. Even more intuitive, short NOK/JPY is a trade that has worked
in each year when oil prices have declined sharply. Again the yen has

Deutsche Bank Securities Inc.

Page 3

13 January 2014
FX Daily: Lower oil prices: FX & asset market implications

special BOJ headwinds associated with it currently, so it is less
obvious that this would play JPY positive, and long USD/NOK is much
preferred.
6.

The CAD would be expected to underperform, perhaps more so in this
cycle, where energy is a larger share of trade, and where relatively
expensive oil production costs means local supply is quickly
threatened as oil prices come down. This is obviously a very relevant
factor for other countries with expensive supply, not least Brazil’s
deep-water drilling.

Partly by process of elimination, the USD would be expected to be a major
beneficiary of lower oil prices, especially if the Fed learns the lessons of past
favorable oil shocks, and does not accommodate the price declines with overly
easy policy, for fear of encouraging an asset bubble.
In all of 1986, 1993, 1997-1998, the Fed tightened policy the year after an oil
price decline, which would certainly fit in with current circumstances where a
further reduction in oil prices, would reinforce the recovery, and lead to Fed
tightening and a broadening of USD strength in 2015.
Figure 2: Oil imports as a share of GDP (2012)
Thailand
Belgium
Taiwan
Korea
India
Greece
Czech Republic
Malaysia
Turkey
Hong Kong SAR
Israel
Hungary
Spain
Philippines
Finland
Portugal
Sweden
Poland
Euro Area
Indonesia
South Africa
New Zealand
Switzerland
Italy
Mexico
United Kingdom
Romania
Japan
Ireland
China
Denmark
Peru
Germany
United States
Canada
Chile
Argentina
France
Brazil
Australia
Colombia
Norway
Russia

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Source: Deutsche Bank, IMF, EcoWin

Page 4

Deutsche Bank Securities Inc.

13 January 2014
FX Daily: Lower oil prices: FX & asset market implications

Table 2: IMF Simulations on Oil price shocks. Scenario 1: $10-20/b increase
for a few weeks. Scenario 2: $150/b

Source: IMF WEO, October 2013 ( http://www.imf.org/external/pubs/ft/weo/2013/02/pdf/c1.pdf3)

Figure 3: Illustrative Impact of Chinese Demand Slowdown on Commodity
Exporters (Percent of GDP)

Source: Source: IMF WEO, October 2013 ( http://www.imf.org/external/pubs/ft/weo/2013/02/pdf/c1.pdf3)

Deutsche Bank Securities Inc.

Page 5


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