The currencies set to gain from oil's spike


With Islamist militants claiming large parts of Iraq at alarming speed, the price of Brent crude has risen above $114 for the first in nine months. Currency experts now warn that there will be winners and losers in the foreign exchange markets on the back this oil spike.

Neil Mellor, a senior currency strategist at BNY Mellon, believes there will be a divergence between certain currencies in the coming weeks if investors remain nervous over Iraq. This divide will be based on countries' ability to pay their debts and their dependency on energy imports, he said.

"Large net importers such as China, Japan and South Korea would face a not inconsiderable hit to growth from a sustained rise in (oil) prices," he said in a research note on Thursday. Their currencies could therefore come under pressure.

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He also points to the so-called "fragile five" (Brazil, India, Indonesia, South Africa and Turkey) who have large current account deficits which could affect their ability to pay debts. While these countries' currencies could also be hit, the Brazilian real should emerge unscathed, due to the country being a net oil exporter.

"India, a country that imports 75 percent of its energy needs and is currently waging an ongoing fight with inflation, therefore appears particularly vulnerable; but we note that it is the Indonesian rupiah that has come under the most pressure to date, despite the country being only a marginal net importer," he said.

The petroleum refinery outside of Bayji in Iraq
Robert Nickelsberg | Getty Images News | Getty Images

Steven Englander, head of G10 FX strategy at Citigroup, says that market participants are also focusing on the recent Federal Reserve meeting as well as events in the Middle East. The U.S. central bank cut monthly asset purchases from $45 billion to $35 billion on Wednesday evening, as expected, but also sounded a dovish note leading to definite "risk-on" sentiment in global asset markets on Thursday.

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"Post-Fed and with Iraq, the general principle is to buy anything with yield or oil," Englander told CNBC via email. In the major G10 currency markets he said that the Canadian dollar could be one asset that is set to move higher against the dollar.

Mellor has also backed the Canadian dollar to appreciate further, with the currency trading higher against its U.S. counterpart since the Fed decision on Wednesday afternoon. He said that the currency - often dubbed a "commodity currency" - had previously enjoyed a correlation with oil prices - meaning a rise when Brent crude spikes. He added this was also true of the , the Mexican peso and the Norwegian krone.

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"The glaring omission from this small list is the (Russian ruble), currency of the world's largest (oil) producer. However, though strong pre-crisis, the currency's performance relative to the price of oil has since fallen to insignificant levels, a reflection, we suspect, upon the country's macroeconomic failings," Mellor said.