Oil prices and FX rates effects

CFA General
#1

Hi guys,

Could you please explain to me what causes a currency to fall (eg ruble) when oil prices go down? In the case of Russia, it has a current account surplus - 13% inflation - 11% nom interest rate and 10y yield spread vs US is c.10% i think? Obviously, all this data tells that fundamentally the currency has to come down but i think the Oil price had a massive play in the story also which i can’t fully understand?

#2

Hi Marwen,

The point here is that oil is priced and traded mainly in USD. Lower oil prices imply less dollar denominated revenues, thus decreased dollar inflows and depreciating local currency. This holds for most of emerging market countries (take Latin America for example) who are commodity exporters as well.

Hope this helps,

Thanks