The FT’s Lex column has an interesting take on why the USD has not benefited from the “risk aversion” trade.
The other day I hypothesised that perhaps there just wasn’t that many big “risk” positions on in the past few months so there was no observable impact on the USD. But Lex reckons its about Oil and the recycling of Petrodollars.
Specifically Lex says:
As oil is quoted in dollars, and higher oil prices create petrodollars that must be recycled, a higher oil price means a weaker dollar, all else being equal. That goes beyond the trading strategies of global macro hedge funds. And if the fear of the moment is a higher oil price, then the dollar offers no sanctuary.
Interesting approach but Lex seems to imply that Petrodollars get instantly recycled into another currency when he says:
…the critical driver of the dollar, and of gold, is oil. Since September, oil has risen some 23 cents in gold terms. Looking further back, the dollar’s epic 2008 rebound started in July, when oil started its crash, and not two months later with the Lehman bankruptcy. Wednesday’s oil surge, taking the West Texas Intermediate contract back above $100 a barrel, coexisted with a fall in the dollar.
I’m not convinced this is a correlation without causality but its an interesting take anyway. The backend of the oil futures curve is moving higher as well implying there might be something sustainable in this latest move higher in spot. If that’s true then the global recovery may be threatened and we should all be concerned.
I’ll return with a longer post on the correlation above. It may be important for the AUD.