The Canadian Dollar hit the $0.80 handle yesterday – the highest level in more than two years. I have written about the Loonie’s interconnectedness to the price of oil before; however, with oil firmly below $50 and the Canadian dollar breaking out, it’s worth reviewing.
Canadian dollar Tops All Major Currencies Since May
The Loonie is the best-performing major currency in the world. Well, over the past two-and-a-half months at least.
According to ThoughtCo.com,
“Canada exports around 2 million barrels of oil a day to the United States. If the price of a barrel of oil is $50 U.S., that is $100 million (U.S.) in purchases that occur every day.”
Data from 2016 confirms that Canadian oil exports to the U.S. remain near record highs. Exports to the U.S. Gulf Coast have shot up since 2014.
Is the Canadian Dollar Still Correlated to Oil Prices?
ThoughtCo. outlines two factors that tie the Canadian dollar to oil prices. First of all, when Canada exports oil priced in U.S. dollars Canadian companies receive the currency, but must convert it to Canadian dollars. Furthermore,
“Since they pay their employees (and taxes and many other expenses) in Canadian dollars, they need to exchange U.S. dollars for Canadian ones on foreign exchange markets. So when they have more U.S. dollars, they supply more U.S. dollars and demand more Canadian dollars.”
The second scenario involves the exportation of oil priced in Canadian dollars. According to ThoughtCo.,
“If oil is priced in Canadian dollars, and the Canadian dollar rises in value, then American companies need to buy more Canadian dollars on foreign exchange markets. So the demand for Canadian dollars rises along with the supply of U.S. dollars. This causes the price of Canadian dollars to rise and the supply of U.S. dollars to fall.”
So, whether the Canadian dollar is up or down in the past few months, more oil exported to the U.S. is a good thing.
Interest Rates | A Key Pillar to Canadian Dollar Strength
Another impetus for the rise Monday is the strengthening Canadian economy. While much of it is based on low-interest rates and expanding debt as we’ve written about, some metrics are turning up.
The Globe and Mail confirmed wholesale sales hit a record high,
“Statistics Canada reported that wholesale sales hit a record high in May as they climbed 0.9 per cent to $61.6 billion. Economists had expected an increase of 0.5 per cent, according to Thomson Reuters.”
In fact, Statistics Canada reported that sales were higher in six of the seven subsectors. So, with a strengthening economy and rising rates the Canadian dollar has room to run. Even more, given the fact Canadian oil exports remain near record levels. Finally, as the Fed looks to pause on rate hikes, the Bank of Canada may not, driving the Loonie higher.
