Monday, February 16, 2015

The Effect of Oil Price to AZN until the Change of Monetary Policy

As we know Azerbaijan was pegging its currency to United States dollar until these days. It meant that no matter what happens AZN will be in the same level of exchange rate against dollar. (~ 1 dollar = 0.78 AZN) So how oil price decline can affect AZN?

If we look at the rates of last years we can see that the value of US dollar is negatively related to the oil price. Because USA is the biggest buyer of oil in the world market and when oil prices get high USA’s supply of dollar increases and dollar loses value. But when oil price gets lower the supply of dollar decreases and dollar appreciates. As Azerbaijan was pegging its currency to dollar when USD gains value AZN also appreciates at the same time. So if we look at the chart below (EUR per 1 AZN, from we can see that AZN appreciated against Euro in a significant level as the oil prices declined.

So it becomes clear that until today’s change in monetary policy of Azerbaijan AZN was negatively related with the oil price. But starting from today the effect of oil prices to our currency will be different as Azerbaijan now pegs AZN to a basket of USD and Euro.