Goldman Look At Terms Of Trade Risks Surrounding Geopolitical Matters

Goldman Sachs note that “the possibility of broader geopolitical escalation in the Middle East has driven renewed upside risk in commodity prices, specifically oil but also natural gas.”

• “FX returns over the past month have already been meaningfully driven by shifts in terms of trade, largely due to the oil price rally during the summer and subsequent reversal.”
• “Now, with the risk of a new global commodity price shock reminiscent of February 2022, we can use our ToT framework to assess the potential currency implications under such an outcome.”
• “Our results imply that NOK, COP, CAD, BRL, and MXN would be among the biggest beneficiaries of a positive oil price shock, while FX in Asia and Europe would be among the most vulnerable.”
• “Meanwhile, NOK, MYR, and AUD should see the clearest benefits of a positive natural gas price shock, while FX in Asia and Europe would once again be the most vulnerable.”
• “Owing to the renewed rise in geopolitical risk, terms of trade should remain a bigger driver of FX over the coming months, likely adding further support to our existing trade recommendation to be short EUR vs. CAD.”