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  • Writer's pictureMohamed Washeem

The strings that bind currencies. Oil & USD

There are many factors that impact the value of currencies. Out of this some of them are clear established links. Some currencies peg themselves to each other and some are closely linked to commodities. The S$/100RMB pair and oil price S$/USD pair are some better known links.

Oil prices and USD

Oil prices are quoted in U.S. dollars (USD). The 2 systems realign between themselves more than countries without much oil reserves. The theory sounds good, but can we observe this in practice ?

Bond between Oil and S$/USD

The correlation between 2 items describes how closely linked they are. Here we see in most years, the S$/USD has a strong negative correlation with oil prices. What does this mean ? Well negative correlation indicates that if S$/USD was to increase, Oil prices would decrease.

This is not surprising. Oil prices are quoted in USD, if the USD becomes stronger, less USD is needed to purchase a barrel of oil.

So what ?

What we can learn is that currency value is affected by many factors that extend beyond the geographical limits of a country. The degree of 'togetherness' between these factors can be identified with data you and I can freely obtain.

Dataset for oil prices:

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