Interest Rates and Oil Prices

Over at Econbrowser, Harvard economics Professor Jeffrey Frankel argues that real interest rates are inversely correlated with oil prices.  

Our analysis suggests this is true, but the correlation is weak, with an R-squared only around 0.08.  Changes in real interest rates don't tell us much about the direction of oil prices.

Oil Price and Interest Rates.png

What's more, nominal oil prices are positively correlated with nominal interest rates, but again, very weakly.  

For this reason, traders will usually key not on interest rates, but on exchange rate movements, which transmit directly into oil prices virtually real time.  Interest rates are, of course, a key determinant of short term exchange rate movements, but their impact on oil trading is more indirect via exchange rates.

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