Why the USD Is Undershooting Oil Prices

While the US's status as a net energy exporter has turned the USD/oil correlation positive, the currency is currently undershooting oil gains due to low rate spreads and domestic natural gas gluts. A model including these factors suggests the DXY is roughly 2% undervalued.

Key Takeaways

• 1.The USD's correlation with oil has flipped to positive as the US became a net energy exporter, but the currency is currently undershooting rising oil prices.
• 2.Interest rate spreads remain a dominant driver; when combined with oil in a model, the USD appears approximately 2% cheap on a DXY basis.
• 3.US terms of trade are being suppressed by a glut in domestic natural gas and a surge in import prices driven by AI-related capital goods.

Table of Contents

• The undershoot
• Firstly, rates go a long way
• The terms of trade haven't risen that much
• Reflect: 1. Export prices haven't risen much as LNG has dragged
• 2. US import prices have been rising quite strongly again
• Who is paying?
• Prices vs volumes
• Other drivers
• Appendix 1
• Important Disclosures
• Analyst Certification
• Additional Information
• International Production Locations

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