No OPEC+ drama this week, Fed signals are more important for FX markets – Danske Bank

OPEC is set to increase production but it is still a long way to go to ‘normalize’. In the view of strategists at Danske Bank, the correlation between oil and FX majors is very low at present. For FX, the direction of Fed policy and reflation outweighs OPEC decisions.

Correlation from oil to major crosses is very low 

“OPEC is widely expected to continue its slow-moving normalisation of production levels this week, following large cuts since the onset of COVID-19 in 2020. In our view, the pivot from the Fed and stronger dollar on top of rising production will keep oil around $70/bbl for Brent. In general, though, the correlation from spot oil to FX is very low currently.”

“If oil prices take a step back from these levels on the back of rising production, this is unlikely to matter much for FX. At the moment, the correlation between FX and spot oil appears very low and this is likely so, as other drivers are at the forefront.”

“For EUR/USD, the effect on spot from rising oil prices remains quite ambiguous. There seems to be much less of a link between spot oil and the reflation theme across assets. In addition, should oil go a bit lower on the back of rising supply, such is different as when the underlying reason is a lack of demand – and especially so for the cyclical currencies.” 

“At some point, and if OPEC remains on a conservative path in terms of production, oil could indeed rise further. To the extent, rising oil prices at some point creates volatility in equities, this will likely be tradeable in a stronger broad dollar but we do not view such as a too relevant consideration at present.” 

“The direction of the reflation trade and Fed will continue to outshine other factors such as oil and OPEC. We remain USD positive.”