News Column

Iraq oil shock to lift safe-haven currencies first

July 6, 2014


A sudden and sustained rise in global oil prices caused by violence in Iraq would initially trigger a rush into safe-haven currencies like the yen and the Swiss franc, despite Japan and Switzerland being importers of crude.Ever since the violence escalated this month and drove oil prices higher, both currencies have held their ground, challenging a view that higher crude prices usually translate into big wins for oil-exporting countries and their currencies.Higher prices improve the trade balance for oil exporters like Canada and Norway and push their currencies higher. Conversely, they tend to hurt oil-importing nations. However, investors are wary that a supply shock could hurt global recovery prospects and hit the less-liquid and riskier commodity currencies at first."Such shocks usually do not bode well for general risk appetite as it raises concerns about global growth and tends to be accompanied by falling stock prices," Petr Krpata, currency strategist at ING, referring to the recent spike in oil prices due to fighting in Iraq."In fact, within the G10 FX space, the dent to risk appetite tends to offset the positive effect of rising oil prices on exporters."Brent crude surged 8 per cent since May to hit a nine-month high of $115.71 in mid-June on worries that sectarian violence in Iraq could hurt oil output. With Iraq contributing to about 11 per cent of the daily production from the Opec oil producers' cartel, any supply disruption would hurt. So far, there is little sign of large scale supply disruptions and oil prices have eased, keeping action in the currency market rather limited.

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Source: Oil & Gas News

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