Oil forex forum
All in all, we find that oil shocks, in particular oil demand shocks, do determine exchange market pressures for oil exporters, which are more visible for floating currencies and which are countered by these countries by increasing or decreasing foreign reserve holdings.
More generally, however, we find that the link between oil price movements and exchange rates is a loose one, which is perhaps another manifestation of the exchange rate disconnect. While we do not cover this episode in our paper, it is natural to ask what happened to exchange rates.
Floating oil currencies depreciating against the US dollar, roughly in line with other currencies. What oil exporters did was to run down their foreign exchange reserves in order to support their exchange rates, in line with our predictions see Figure 2. Moreover, and interestingly, both hard pegs and supposedly floating currencies did that.
A man looks at a stock quotation board outside a brokerage in Tokyo. The views expressed in this article are those of the author alone and not the World Economic Forum.
The terms of trade: A negative terms of trade shock say, a fall in oil prices for an oil exporter drives down the price of non-traded goods in the domestic economy and thereby the real exchange rate, which is defined as the relative price of a basket of traded and non-traded goods between the domestic and the foreign economy.
As prices of non-traded goods may be sticky, the adjustment of the real exchange rate could require nominal exchange rate depreciation too; Wealth effects: A negative oil price shock transfers wealth from oil exporters to oil importers, leading to large shifts in current account balances and portfolio reallocation see Kilian In order to restore the external net financial sustainability of oil importers exporters , the real exchange rate has to depreciate appreciate following a negative shock to the oil price, in order to improve the non-oil trade balance.
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