Confused About Crude? You’re Not Alone; Global Macro Traders Tongue-Tied

MarketsMuse excerpt from Feb 3 edition of Rareview Macro LLC’s  Sight Beyond Sight global macro commentary..

Professionals Not Discussing Crude Oil Strength…Short Euro Put on Hold

This is simple.

Neil Azous, Rareview Macro
Neil Azous, Rareview Macro

WTI crude oil is now up ~18% from the January 29th lows. It is not a question of whether the bounce continues or worth debating whether a V-shaped or U-shaped recovery is materializing. What is more important is whether a low was made and a new medium-term range is now being carved out.

Now anyone who monitors cross-market correlation will understand that the price of a barrel of Brent crude oil is highly correlated with the inverse of the trade-weighted dollar. Therefore, if the price of oil is stabilizing there is a quantitative argument that the dollar will stop rising, at least in the short-term.

Professionals are highly sensitive to pattern recognition and the last two times the Euro-Dollar (EUR/USD) corrected (i.e. Oct & Dec 2014) the currency cross appreciated by 2.5-3.2%. This is in line with the current bounce off the low price (i.e. 2.6%) following the ECB meeting in January.

So the question is why is it that those who never participated in the first place or those that reduced their long dollar exposure at the end of 2014 and missed the January QE move, but believe the currency cross will trade down to parity (i.e. 100) by the end of this year, have not used this bounce to get short of EUR/USD, especially considering you now have policy confirmation from the ECB?

The first answer is the growing fear over the counter-trend in crude oil and the correlation to any trade-weighted dollar weakness.


Now most are convinced that ECB-FOMC policy divergence will prevail and that is fine. However, in the absence of a new catalyst, EUR/CHF having a better valuation profile than EUR/USD, and the “barrel” still going up, that policy divergence is a story for another day now. In the interim, we would recommend you focus on another currency cross/pair or find an idiosyncratic currency situation to pass the time.

The second answer is that if you speak to any professionals in discretionary macro who trade primarily in the short-term, they will tell you that being short of the EUR/USD just does not feel compelling right now. The reason for that is that the major policy catalysts have already been discounted in the price, the analogues associated with the dollar making a high/low for the year in the month of January are statistically significant, and there is a perception that the US data has been softer. On top of all that,  whether you want to believe it or not, the valuation following the Swiss National Bank’s (SNB) abrupt policy change in mid-January actually made it very intriguing for investors to buy Euro-Swiss (EUR/CHF) and that complicates Euro exchange rate pair trading.

This is part is NOT simple. But stick with us as we try to explain something we think is significant. 


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