Loonie Rebounds With Oil

Neil Davies, Head of Trading at PlutusFX, takes a look at the Canadian Dollar (CAD).

Since the price of oil peaked in June, it has seen a rapid fall off, from a high of $113 per barrel of Brent Crude to a low of $83 last week. Over the same period the Canadian Dollar has had a torrid time, weakening against the USD from USD/CAD 1.062 in early July to 1.138, the day before oil’s peak.

The last few days have seen a relief rally for both commodity and currency, standing at $86.6 USD/CAD 1.122.

There is no better barometer in the FX world for oil than the Canadian Dollar. The bulk of imported oil in the world’s largest economy comes from Canada, outstripping Mexico, the second biggest supplier. Oil is by far and away Canada’s biggest export across the border, with its second biggest buyer being Japan. Clearly the export costs to the US are favourable as is having such politically stable countries as the best customers.

However, the much publicised rise of Shale Gas production in the US over the last five years continues to unbalance traditional relationships, to the extent that in certain quarters the 40 year old ban on US Oil exports is being considered. It is though this drop in crude prices and the associated fall in the CAD, that may ironically be the Loonies saviour. Decreasing energy prices may render some expensive Shale horizontal drilling uneconomical. Indeed, it is estimated that at an oil price of $70 a barrel, shale gas growth would cease altogether.

Ultimately then, contrary to the expectation that cheap oil means a weak CAD, it may well be that ultimately, should it happen, a more significant energy price drop could, at least with this pair, save the CAD from falling off a cliff.



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