The continued pressure on the oil sector is wreaking havoc on the Canadian dollar.
This morning, the Loonie continued its freefall by losing another -1.1% , bringing the current exchange-rate to US$0.69. It’s the first time the Canadian dollar has traded below US$0.70 in 13 years, but the damage could be even worse.
David Doyle, a top forecaster for Macquarie Capital Markets, lowered his projection for 2016 to have the loonie finish at US$0.59. This would eclipse the all-time low for Canadian dollar, which was set on Jan 21, 2002, at just below US$0.62.
“Lower for Longer”
In this week’s chart, we show the well-established relationship between the Canadian dollar and the price of oil. Both prices have moved in tandem since 2000, and they’ve also both nosedived since the collapse of oil prices in mid-2014.
In fact, it may not surprise you to know that there are traders out there who use the Canadian dollar as a proxy for oil prices. If they think oil is going lower, they’ll sell Canadian dollars if it offers them the right kind of market exposure.
Oil is now trading at its lowest price since 2004, and many analysts believe that the pressure on prices will continue. Pundits are talking $20 oil and even $10 oil. While it’s very possible neither of those thresholds are reached, what is known is that low oil prices mean the Canadian dollar will continue to be under duress.
However, what are the specifics of this relationship? Canada is surely an economy that has a heavier reliance on raw materials, but it is no Saudi Arabia, right?
The Relationship Between Oil and the Canadian Dollar
The key to this relationship is based on two major principles.
Firstly, while Canada is a major producer of oil, it also exports the majority of this production to the United States. In 2014, Canada produced 4.4 million barrels of oil and equivalents per day, and it exported 3.4 million of this to the United States. Billions of US dollars are changing hands between American buyers and Canadian producers.
Oil prices are mostly traded in US dollars, which means that as the price drops, there are less US dollars being paid out to Canadian producers. This means producers are exchanging fewer US dollars for the Canadian dollars they need to pay wages and production costs. This drops the amount of “demand” for Canadian dollars, which affects the price of the currency.
Lastly, because oil is denominated in US dollars, the above effect gets further amplified by any other changes to the USD/CAD relationship. For example, while Canada has been loosening its monetary policy, the United States has been trying to do the opposite. This, along with other factors, has led to strength in the US dollar.
A strong dollar means cheaper oil. Cheaper oil means lower demand for Canadian dollars.
When you only can offer “rocks and trees” (resources) what do you expect?
Developer’s still making “shacks” for $750,000 on Vancouver Island, you would think that there is a runaway economic boom going on here!!
Talk about shear lunacy!!
Canada is in for a major shock in the next couple of months and all the finance minister can do, is go to Alberta and ask the oil people what he should do??? Are you seriously f@#&ing kidding me?? He and skippy don’t have a clue or more importantly…..a PLAN!!
Were so screwed!!
But then again any country that is resource based will feel the coming wrath of a major recession or even a depression by the summer time.
The Canadian peso…er I mean Loonie, as well as it’s citizens are in for a very rough ride.
They also had a long run of halcyon days while others had to take-it-up-the-ass paying $4/gal gas. Suck it up, Canucks.
Only because the US dollar is the best looking horse at the glue factory slaughter pen!
Gold is up in virtually every other fiat currency, except the US dollar.
When (not if) the US dollar does go south, the American public will be caught flat footed and blind sided, by the rapid rise in the cost of gold in the US dollar.
When this occurs it will be much too late to obtain gold at ANY price. It will go NO OFFER.
The “strong” dollar is just as dangerous to the global economy, as is the “cheap” price of oil.