Can Oil Boost Canadian Dollar?

The previous surge of crude oil provided an uptrend in theCanadian dollar, however, it seemed it was not the only factor that affects the loonie. Market participants have been considering the current run of the Canadian economy, perceiving a great challenge in the future.

During the previous sessions, crude oil reached its 3-week high, indicating a strong support for the commodity currencies. Aussieand loonie are just some of the currencies that depend on the export of certain raw materials for income. As a net oil exporter, Canada has a direct relationship with the price movement of the commodity.

Canada has been the seventh largest producer of crude oil globally, aligned with the major oil producers. The country has also a significant size of oil reserves with increasing productions in oil sands.

As seen in the image below, the Canadian dollar follows in trend of oil from 2005 to 2009.

CAD (blue), Crude Oil

Given the renewed expectation for the cooperation of the major oil kingpins in the output freeze, oil price made a jump in the recent session, touching 3-month-high. This could be a strong indicator of the Canadian dollar’s surge, however, market experts believed that the problem does not lie in the performance of oil alone -- it’s the struggling economy of Canada.

In the second quarter of 2016, the economy of Canada slumped 1.5 percent and it was followed by the biggest trade deficit of $3.6 billion in June. Experts suggested an adjustment of the monetary policy of the Bank of Canada, however, the chance could only play from 10 to 20 percent.

Euromoney magazine said, “There’s concern the Bank of Canada will ease policy, even if oil remains stable. The focus has shifted away from oil to the non-oil part of the Canadian economy.”

One of the strong gauges of the health of one’s economy is through its employment data. As seen in the previous reports, US job dataclaimed successive gains while in Canada it went to the other side. In July, U.S. employers were able to add 255,000 jobs while the labor market in Canada fell in the last two months.

For this month, oil price has improved to 8 percent already while the currency advanced for only 0.5 percent, far from the expected close trading movement. Based on a research released by Statistics Canada, a great number of Canada’s exports came from passenger cars and light trucks and crude oil was the second priority of the country. If ever oil could touch above $50, then it could be the start of a strong comeback of the loonie.

Earlier today, USD/CAD lost around 0.10 percent to trade 1.2913. The pair was struck by the weak U.S. manufacturing activity data and the downbeat U.S reports last Friday. Meanwhile, the Euro remained steady against the loonie.