Iran war causes correlation between oil prices and emerging market currencies to drop to the most negative level in 27 years

Golden Ten Data reported on March 12 that the Iran war not only broke the decades-long relationship between crude oil and emerging market currencies, but also reversed it, with their correlation dropping to the most negative level in at least 27 years. Amid an energy supply shock, Brent crude oil futures saw their biggest surge since 2020, while the MSCI Emerging Market Currency Index is heading for its worst single-month performance since the end of 2024. The 120-day rolling correlation coefficient between the two has fallen to -0.34, marking the most significant divergence since 1999. Historically, these two asset classes have usually been driven by the same factors, including global economic growth, commodity demand, dollar liquidity, and cross-border capital flows, but this situation has now changed. Since the beginning of this year, oil prices have become a catalyst for risk-averse trading and safe-haven capital flows, as the severity of this supply disruption exceeds that of the 1970s. Investors are returning to US assets while selling high-risk investments in developing countries. Therefore, rising oil prices increasingly mean falling currencies in developing countries.