Euro view as oil outperforms gold

Year to date, Brent oil is up 12%, while US crude WTI is up only 3.8%. With fundamentals and technical looking positive for both, the upside potential for crude suggests $115-117 per barrel as an interim destination.

Implications for currencies: Rising oil prices are usually move in tandem with euro (generally USD-negative) with the rationale being that oil importers increase demand for oil as its USD-price becomes declines. The other explanation is that a weaker US dollar, increases the need for exporters to raise oil prices to make up for the lower exchange rate from USD into their currencies.

If crude does exceed the 110 level, then this would augur well for EUR/USD based on the aforementioned rationale. So far, the rise in oil may not have lifted EUR/USD as it would have in normal conditions, but it did help supporting it around $1.30 throughout the Greek uncertainty.

Implications for equities: Declining Gold/Oil ratios have historically proven positive for global stocks and risk appetite, with the rationale being that the improvement in oil (usually reflecting rising global demand from improved growth) is to an extent that it outperforms gold. The latter tends to lose its lustre as global conditions improve. As the Gold/Oil ratio begins to rise, it reflects the declining value of oil, which reflects weaker demand/global growth conditions. The weakness of this ratio does not address supply issues but the historical correlations between G/O ratio with equities remains robust. If the Gold/Brent ratio declines below its 200 week moving average, then the prolonged declines would have powerfully positive implications for equities.

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