Canada: Canadian dollar surges on the back of a solid increase in oil prices
April 15, 2016
On 26 April, the Canadian dollar (CAD) closed at its strongest value in nearly 11 months. The dollar reached 1.26 CAD per USD, which corresponded to a 5.1% gain over the past month. The reading also a 8.9% strengthening on a year-to-date basis; however, it remains 3.5% weaker than on the same day last year. After hitting a multi-year low in mid-January, the Canadian dollar has followed the rally in commodity prices and has strengthened considerably, and has appreciated by over 25% since 19 January.
After hitting an apparent price floor in February, oil prices have steadily increased as market sentiment regarding global growth improved, while energy production remains roughly stable. This sentiment persisted even after the much-anticipated meeting among oil producing countries in April failed to yield any agreement regarding production caps. Energy products make up approximately 15% of Canada’s export profile and, therefore, prices of these products play a large role in the valuation of the currency. Non-energy exports have benefited from increased competitiveness stemming from the weaker CAD; however, the steep appreciation in recent months may harm such exports, particularly in the manufacturing sector.
Although dynamics in the energy market are having an impact on the Canadian dollar, signs of a strengthening economy have also lifted the dollar as well. However, as Warren Kirkland, economist at TD points out, there is more to the CAD’s increase than just oil:
“The recent oil price rally is a welcome development for beleaguered Canadian producers. However, the potential benefit is being partly offset by a corresponding rally in the loonie. […] While the loonie’s rise is partly an oil story, strong retail sales and inflation data gave it a boost also. Retail sales were up 0.4% m/m in February and a whopping 1.5% m/m in volume terms indicative of healthy consumption growth in Canada aside for the oil patch – Alberta and Saskatchewan were the only two provinces to register monthly declines.”
Although the dollar is being supported by a strengthening of the Canadian economy as well as by an increase in oil prices, a drastic change in the prices of oil could see the CAD weaken again. Oil prices have proved to be a very volatile, and the potential exits for a reversal in their upward trend. This could in turn drag on the Canadian dollar. In fact, some analysts are speculating that oil prices have risen beyond what their fundamentals warrant, thus putting the Canadian dollar’s recent gains in jeopardy.
Author: Robert Hill, Economist