My British and Aussie/New Zealand readers will understand the above headline, as will those who have spent any time (as I have) with friends or colleagues from there. The rest of you will figure it out quickly enough as you read on. No, itÂ isn’tÂ about urine!Â 🙂
Actually, I’m not talking about the whole of Goldman Sachs here. It’s just one analyst based in London (I believe), but does demonstrate that not everyone who works for the company is brilliant.
A colleague of mine sent along this story
Goldmanâ€™s Currie Says Oil Drives Dollar Down, Not Vice Versa
2009-11-04 11:19:12.989 GMT
Â By Juan Pablo Spinetto and Alexander Kwiatkowski
Â Â Â Â Nov. 4 (Bloomberg) — Crude oil, which has risen 80 percent this year, is causing the U.S. dollar to weaken, driving metals and other commodities higher, according to Jeffrey Currie, head of commodity research at Goldman Sachs Group Inc.
Â Â Â Â While oil has risen, the U.S. currency has weakened, leading to speculation that the dollarâ€™s depreciation is driving investors to buy oil as an inflation hedge, thereby pushing up the price of crude.
Â Â Â Â â€œI would argue the other way,â€ Currie said in an interview yesterday in London. â€œI would argue that higher oil prices drive the dollar down and then the weaker dollar drives the metals and soft commodities up.â€
Â Â Â Â The U.S. currency dropped to the lowest in more than a year against the euro on Oct. 26, while the dollar index, an indication of the international value of the currency, has lost 6.4 percent this year. Gold for immediate delivery has climbed 24 percent to a record this year while sugar is up 70 percent.
Â Â Â Â â€œOil represents 40 to 50 percent of the U.S. current account deficit, so a higher oil price represents an outflow of dollars that pushes the currency lower,â€ Currie said in the interview, after attending a Chatham House conference on food security.
Â Â Â Â Goldman Sachs estimates that oil will reach $85 a barrel by the end of the year on Chinese demand for diesel, and $95 within 12 months time. Crude oil for December delivery traded at $80.35 a barrel, up 0.9 percent, on the New York Mercantile Exchange at 10:48 a.m. London time.
The immediate thing that jumped out at me was the “Oil represents 40 to 50 percent of the U.S. current account deficit…” bit. This is a really poor statistical analysis. I hesitate to even given it that much credit. You can say oil is X% of the total outflows. That would be fine.Â You cannot, however,Â state that one thing or another is X% of a deficit. A deficit comes about because outflows in total exceed inflows. It doesn’t mean some components are placed in the part of the equation that balances while others are placed in the deficit portion.
Be careful what kind of stats you accept – even from the so-called experts (and especially from politicians!) – as sometimes folks just don’t look at things the right way and in other cases they only present the information which supports their position (intentionally or otherwise). And watch out for making the same errors in your own analysis. They are insidious little buggers that can do real damage.
The said thing is this guy probably makes a lot more money than me. Maybe I should put in for a job at Goldman. 🙂
OK. Got that rant out of my system.
Here’s the real issue with what this Currie bloke is claiming in regards to the Dollar/Oil relationship. Oil prices can change without there being any change in currency exchange rates. It just becomes more or less expensive inÂ all currency terms. This is what you would expect if prices are being driven mainly by supply/demand considerations. In other words, a rise in oil prices does not have to result in a decline in the exchange rate of the dollar.
On the flip side, though, a broad change in the value of the dollar against the other world currencies MUST result in a change in the dollar price of oil,Â holdingÂ the previously noted oil market supply/demand element equal.
Take a look of this chart of the correlation between EUR/USD and Oil prices.
The chart above shows the rolling 1-month correlation between the EUR/USD exchange rate and Oil prices. That means each point on the chart shows the correlation between the two markets for the prior roughly 22 trading days. It shows that while most of the time the two have moved in the same direction (oil up, dollar down), there have been times when there’s been either little or no link, and at one point it the relationship was quite inverted. If oil was the main driving force in the dollar’s moves we would expect to see a moreÂ sustainedÂ positive correlation (though not necessarily always near 100%), not one that’s all over the place.