Despite crude price pickup, Canadian dollar sags

Even though oil prices have rebounded, the loonie still lags due to the languishing Canadian economy

According to an August 15 Bloomberg report, Canada’s economic recovery has lagged so badly that even a rebound in crude prices is failing to boost the nation’s currency.

As oil surged 8% in August, the loonie inched up only 0.5%, falling behind other commodity-linked currencies like the Norwegian krone and the Mexican Peso. The Great White North’s relative economic weakness was put in sharp relief on August 5, when jobs data showed the US economy gaining traction while Canada’s slipped.

There is a silver lining, though. BoC Governor has been counting on non-energy exporters to drive the country’s economic comeback, so the untethering of the currency from crude may prove beneficial.

“The market’s finally turning its attention away from that tiring story line, and other drivers of the Canadian dollar are stepping into the spotlight,” remarked Bipan Rai, senior foreign-exchange and macro strategist at Canadian Imperial Bank of Commerce.

With the four-week correlation between Canada’s currency and crude oil futures dropping to 0.38–a value of 1 indicates that one rises perfectly with the other–the Canadian dollar’s fate is now more affected by the gap between North America’s two largest economies. A contraction in Canada’s labor market, a 1.5% decrease in Canada’s economy in Q2 (based on a Bloomberg survey), and a trade deficit of $3.6bn in June all show cause for alarm.

Foreign inflows into the Canadian bond market, inspired by a global hunt for yield among investors, has also caused the loonie to decouple itself from the advancing locomotive of crude oil prices. This seemingly reduced relevance of black gold is fueling speculations of another rate cut later this year.
“There’s concern the Bank of Canada will ease policy, even if oil remains stable,” said Steven Englander, global head of Group-of-10 currency strategy at Citigroup Inc. in New York. “The focus has shifted away from oil to the non-oil part of the Canadian economy.”

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