Oil - inflation - the ruble exchange rate. How to make a forecast?
If we are trading a particular currency pair, I think it is logical to try to understand what other factors can influence its rate. In addition to strong correlations of certain currencies and equity markets, you should also remember about correlations of commodity markets with currencies of commodity nature because they move in strong correlation - fluctuations in one market will certainly lead to changes in the other. It is necessary to see the whole picture. This will allow you to protect yourself from sharp, unpleasant fluctuations in exchange rates, as well as to make a profit by taking advantage of the opportunity to trade on the trend.
Oil - interest rates - commodity currencies
Consider the relationship between changes in the quotations of certain currencies and the dynamics of interest rates, as well as correlation commodity and currency markets. The result of this approach will be a forecast of possible actions of central banks, based on the macroeconomic background, changing as a result of price movements on the commodity market.
The price dynamics of the oil market can be both a driver of growth in consumer prices and a reason to slide into deflation. Low oil prices inevitably lead to a decline in inflation indicators. Declining inflation, on the other hand, brings with it a string of adverse factors, such as falling industrial output, weak GDP and rising unemployment.
However, the opposite relationship would also be true. At a time of high demand for fuel and rising prices, raw material exports have a positive effect on the foreign trade balance of exporting countries, which eventually leads to an increase in the exchange rate of their national currencies and, over time, to rising inflation.
As a result of these macroeconomic changes, central banks are beginning to implement policies that are consistent with current realities, and any actions by the Central Bank within the monetary policy affect the exchange rate of the national currency. Let's look at some examples.
Using the Russian ruble as an example
Thus, the Canadian dollar and the Russian ruble are highly correlated with oil, because hydrocarbon production has the greatest weight in the industry of Canada and Russia. The fact of undervalued raw materials reduces the level of income from its sale, the profit indicators of industry companies fall, and there is also a change in macrostatistics. In its turn, cheap oil and holes in pre-planned budget make central banks of raw material states to conduct a policy of low interest rates or refuse from the policy of keeping the exchange rate down. Such regulatory behavior reasonably leads to long-term drops in national currencies.
Let's look at the theory with an example.
There is also a clear correlation between oil and the Russian ruble from 2014-06-16 to 2016-01-11. The drop in oil prices led to a weakening of the Russian currency by 128%. The USD/RUB currency pair rose from 35 RUR/USD to 80 RUR/USD.
Stabilization of the budget after the sharp fall in the value of oil led to the establishment of absolute anti-record by the Russian ruble. Literally, the regulator put the fate of the currency in the hands of the speculative market, the exchange rate declined, and this, in turn, helped level out the resulting distortions in the budget, as the depreciation of the ruble compensated for the fall in oil prices.
In the case of the Central Bank of Russia, changing the main interest rate was not the main instrument, because its effect was minimal. In this case, the exchange rate depreciation occurred as a result of changes in the monetary policy of the regulator, but not through changes in the cost of credit, but through interference in the course of trading on the domestic foreign exchange market. In other words, the regulator abandoned currency interventions.
Using the Canadian dollar as an example
From 2014-06-16 to 2016-01-11, there is a clear correlation between CAD and Brent crude oil. Oil quotations fell from 114$ to 30$ per barrel, a drop of 73.7%. At the same time the currency pair USD/CAD rose from 1.0700 to 1.4500, the decline of CAD was 35.5%.
The Bank of Canada, in order to combat low inflation, cut its key interest rate twofold. These actions were easily predictable, because the regulator had room for maneuvering in this direction - the main interest rate was 1.0% by the time oil quotations fell deeply.
Total
By observing oil prices and the movement of commodity currencies, it is easy to notice a clear direct correlation. This helps in building a medium-term forecasting model based on changes in interest rates, and in determining the beginnings of medium- and long-term trends in the foreign exchange market. There is also intraday correlation of instruments that can be used as additional signals to find optimal moments to enter the market.