Hormuz Jitters Lift Oil and Leave Importer Currencies on the Back Foot

Few things expose the fault lines in the currency market quite like a move in crude. Rising oil prices put pressure on the currencies of major energy importers, including the euro, the British pound, the Swiss franc and the Japanese yen, and a fresh rebound in oil has brought that relationship back to the surface. Fading hopes of a diplomatic breakthrough with Iran and a reported incident in the Strait of Hormuz have added a geopolitical edge, pushing oil supply risk back up the agenda. For traders in the major currency pairs, the question is no longer if oil matters but how much of the squeeze importer currencies can absorb while the U.S. dollar stays on the front foot.

Fawad Razaqzada, StoneX Media Market Analyst, has more than 12 years of trading and analysis experience across forex, indices, commodities and cryptocurrencies. He covers how macroeconomics, central bank policy and price action interact across the major currency pairs, which brings the link between crude oil and importer currencies directly within his coverage.

Key Themes

• A rebound in oil prices pressures the euro, pound, Swiss franc and yen, the currencies of major energy importers.
• A reported cargo vessel incident in the Strait of Hormuz renews concern about oil supply risks in the region.
• Hawkish Federal Reserve expectations widen the U.S. interest rate advantage over most other developed economies.

Watch the Full Video

Oil Rebound Puts Pressure on Energy Importers' Currencies

"This is putting some pressure on the likes of the euro, the pound, the Swiss franc as well as the Japanese yen, currencies of major importers", Razaqzada says of the bounce in oil prices. The rebound in oil weighs on the euro, the British pound, the Swiss franc and the Japanese yen at the same time, since each is the currency of a major energy importer. Notably, that oil-driven pressure arrives while the U.S. dollar is already on the front foot, so importer currencies are contending with two headwinds rather than one. Is it any surprise, then, that a bounce in crude shows up so quickly in the currency market? Consequently, a move in oil reaches well beyond the energy complex, shaping conditions for energy importers' currencies against the dollar.

Strait of Hormuz Incident Revives Crude Oil Supply Risk

A reported incident involving a cargo vessel in the Strait of Hormuz has revived concern about supply risks in the region, helping crude oil prices climb back as diplomatic hopes fade. Donald Trump's comments at the United Nations suggesting a deal with Iran could potentially be reached after the U.S. election met a fairly cool response from Tehran, and Razaqzada describes the outcome as "hopes of an imminent de-escalation and peace fading, with oil coming back". Risk appetite, which had improved earlier as oil prices came down, has since faded somewhat, with European markets coming under pressure. Unlike the relief seen when oil eased, renewed supply risk leaves the euro, the pound, the Swiss franc and the yen exposed to further energy-driven swings. According to Razaqzada, "the risks to the crude oil prices remain skewed to the upside in the near term".

 

--- Written by Gus Farrow, Senior Manager, StoneX Media

--- Expert: Fawad Razaqzada, StoneX Media Market Analyst