Decades-Long Pattern Broken! Middle East Conflict Completely "Tears Apart" Crude Oil and Emerging Market Currency Trends

Financial Express APP learned that the Middle East situation has not only broken the long-standing correlation between crude oil and emerging market currencies over the past decades but has also completely reversed their trends, with the correlation coefficient dropping to its lowest level in at least 27 years.

Due to the energy supply shock caused by the Middle East conflict, Brent crude oil futures saw their largest increase since 2020. Meanwhile, the MSCI Emerging Markets Currency Index is heading toward its worst monthly decline since late 2024. This has caused the 120-day rolling correlation between the two to fall to -0.34, the most negative since data was first recorded in 1999.

Historically, these two asset classes have always been driven by the same macro variables: global economic growth, China-led commodity demand, US dollar liquidity, and cross-border capital flows. Over the past 25 years, crude oil has experienced four multi-year bull markets with gains exceeding 200%, during which the MSCI Emerging Markets Currency Index also rose in tandem, repeatedly reaching new highs.

Now, this pattern has been completely rewritten. This year, driven by supply disruptions far exceeding those of the 1970s, oil has instead become a catalyst for safe-haven trades, with funds flowing into safe assets. Investors are flocking back to US assets, selling off high-risk positions in emerging markets. The result is: rising oil prices often mean falling emerging market currencies.

Grant Webster, Head of Emerging Market Sovereign Debt and FX at Ninety One, said that the positioning structure is amplifying the negative impact of oil prices on emerging market currencies.

“The Middle East situation pushes up oil prices and depresses market sentiment, while foreign investors’ holdings of emerging market currencies are already high. Therefore, the decline in emerging market currencies is partly due to worsening trade conditions and partly due to position unwinding and widespread sell-offs of global risk assets.”

On Thursday, the emerging market currency index fell 0.3%, with a total decline of 1.4% in March; Brent crude oil surged 5.5% to $97.05 per barrel, with the monthly increase expected to reach 34%.

Market structure has quietly changed

Until a decade ago, emerging markets were mainly dominated by commodity-exporting countries. But as technology firms and financial institutions increased their weight in benchmark indices, this pattern has long since changed. Similarly, the rise of net energy-importing countries like India and Turkey has weakened the link between currencies and oil prices.

Currently, with geopolitical risks erupting, pushing up inflation expectations, delaying central bank rate cuts, and boosting US Treasury yields, the two asset classes are being torn apart and moving in completely opposite directions.

Webster believes investors should wait for oil price volatility to settle before seeking opportunities in emerging market currencies. Economies that are net oil exporters, have low oil import dependence, and moderate inflation will be more favored.

Conversely, economies heavily reliant on oil imports or with high inflation will face pressure.

However, Webster added, “I think this volatility is temporary,” and even if oil prices stay high, market shocks will eventually subside, and positions will be cleared. At that point, investors can strategically position themselves to benefit from or hedge against different currencies.