BofA: The Effect Of Oil Supply Constraint Shock On FX

Bank of America note that “the recent oil price surge as a result of OPEC+ supply cut has reshaped the prevailing FX market narrative.”

• “Contrary to the negative relationship between USD and crude oil prices, an oil supply shock has been more bullish than bearish for the USD in the post-pandemic environment.”
• “Looking ahead, we expect the USD to be broadly supported until end of the year amid persistently tight oil supply.”
• “In G10, we are bullish CAD vs European FX (GBP, EUR, and CHF) on oil supply-driven terms of trade divergence.”
• “In EM, we prefer to focus on the eventually arising risk-off trades rather than to chase the oil rally here.”
• “We are generally bearish EM vs USD, especially in the CEE and LatAm currencies that have been popular carry trades, but now come under pressure from rising volatility and a worsening growth/inflation trade-off challenging central banks.”