The Canadian dollar is sinking in a sea of crude. West Texas Intermediate (WTI) oil prices entirely erased all its gains from the run-up in prices ahead of the Organization of the Petroleum Exporting Countries and non-OPEC meeting last week.
The cartel and friends agreed to an unprecedented 10-million-barrel-per-day production cut that would take effect on May 1. However, over-production was only part of the problem behind the drop in oil prices in 2020. The draconian measures enacted by 187 countries, essentially locked one-third of the world’s population in their homes. Business closures and travel restrictions crushed demand for crude products, at the same time as Saudi Arabia, and Russia ramped up production.
The resulting massive oversupply and the ongoing coronavirus restrictions around the world will continue to depress crude demand for the next few months. Yesterday’s API report showing U.S. crude inventories rose by 13 million barrels in the week ending April 9, underscored the supply imbalance.
The Energy Information Administration hopes that falling production from Canada and the U.S. combined with increased crude purchases by China, South Korea, India, and the U.S. to top up strategic reserves, and the announced production cuts, will turn the oil surplus into a deficit in the second half of the year.
The International Monetary Fund (IMF) released its quarterly World Economic Outlook (WEO) yesterday. The IMF slashed its 2020 global growth forecast by 6.3%. In January, it expected growth of 3.3%. It now expects negative 3.0%, and that is its best-case outlook, which assumes "that the pandemic and required containment peaks in the second quarter in most countries in the world, and then recede in the second half of this year." They went on to say that the global lockdowns make this the worst recession since the Great Depression.
Wall Street ignored the WEO news, but Asian markets were not as forgiving. They quickly shifted into risk-aversion mode and bought U.S. dollars.
The antipodean currencies were slammed, led by a 1.58% drop in the Australian dollar and a 1.43% decline in NZD/USD.
The Canadian dollar followed the antipodean currencies lower and extended the losses in early Toronto trading today. The currency is on the defensive due to low oil prices and because of caution ahead of today’s Bank of Canada policy meeting and the tone of Governor Poloz’s press conference. The BoC is likely to leave monetary policy unchanged.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadians
