Thread by @jnordvig

The dollar is not what it used to be.

A specific example: the correlation to oil...

(short THREAD)

There used to be many arguments why the dollar was NEGATIVELY correlated to oil

1/ The US is more energy intensive
2/ Petro-dollar flow supports other currencies
3/ Other central banks are more sensitive to headline inflation (=energy) than the Fed

And this is how it looked like pre-GFC, EURUSD and oil prices looked nearly identical on the chart (I have admittedly picked the most extreme period, around 2007).

In other words, the USD used to be strongly negatively correlated to oil prices.

But a lot of things have changed since then:

First, the ECB has learnt to care much less about headline inflation (it simply wants to get inflation higher, to get rid of the undershooting)

https://twitter.com/jnordvig/status/1447569065283837966

Second, the US has become a big energy producer, and the deficit on the commodity balance has been erased (it was huge back in 2006-2008 when oil prices were spiking)

And now the EURUSD vs Oil picture looks the opposite of back in 2007. EURUSD has collapsed, while oil prices have spiked.

In other words, the dollar is strongly POSITIVELY correlated to oil prices.

Obviously, there is more than one dollar (and USDCAD has not moved the same way as USD vs EUR). But EURUSD is still the most important FX rate (and EURUSD drags all other European currencies with it, and some EMs too)

And this is the point, when I am ready for a number of 'fancy' econometric feedback.

So to complement the simple charts, here is the oil coefficient for USDvsEUR in a multivariate @ExanteData regression (and yes, it is done in changes to avoid spurious stuff)

Turning positive!

I will leave it at that. The dollar is not what it used to be. And the oil correlation is one thing that has changed. And it matters for trading.

END