The Canadian dollar is on a roll, an oil barrel roll to be specific. Oil prices have surged since WTI bottomed out on January 1 at $42.45 U.S./barrel. Since then, prices have risen 17.2%, peaking at $49.74 yesterday. It isn’t a coincidence that the Canadian dollar rallied 2.9% in that time span.
Oil prices are being supported by the onset of new Organization of the Petroleum Exporting Countries and Russian crude production cuts that took effect at the beginning of the year. They got an added boost yesterday when Saudi Arabia said that would cut their oil production to 7.1 million barrels per day. That news came alongside an improvement in the U.S./China trade dialogue which raised global growth expectations.
The Canadian dollar got an added benefit from a reduction in the discount for Alberta’s Western Canada Select. (WCS). Alberta crude traded at $29.50 U.S./barrel below WTI at the end of December, mostly due to overcapacity from distribution constraints. The government of Alberta forced a production cut of 325,000 barrels. Since then, Alberta producers have increased oil shipments by rail, and the WCS discount has narrowed.
Higher prices for domestic crude will give the Bank of Canada some more flexibility which may be seen tomorrow. At the December BoC policy meeting, the BoC left interest rates unchanged, and concerns about oil prices and global trade led to the statement being viewed as dovish.
That view was reinforced the next day when Governor Stephen Poloz said in a speech: "Oil prices have fallen sharply since the October Monetary Policy Report (MPR), reflecting a combination of geopolitical developments, uncertainty about global growth prospects, and expansion of U.S. shale oil production. Benchmarks for western Canadian oil – both heavy and, more recently, light – have been pulled down even further by transportation constraints and a buildup of inventories. In light of these developments and associated cutbacks in production, activity in Canada’s energy sector will likely be materially weaker than expected." The Canadian dollar sank.
The past week’s price action seems to have eradicated the recent pessimism, at least for Canadian dollar traders. The jury is still out for the policymakers at the BoC. Last Friday’s Canadian employment report was better than expected, which is a tad surprising as it followed a robust November report. The U.S./China trade talks appear to be progressing increasing the odds for some sort of deal being announced. Wall Street has rebounded from earlier weakness.
However, the shift in market dynamics is still too new for the BoC to change their dovish outlook. Otherwise, it would be accused (rightfully) of flip-flopping on policy and exacerbating market confusion. We will know tomorrow.
Canada November trade data is due this morning and likely to show that the trade deficit widened in December due to falling oil exports.
Rahim Madhavji is the President of KnightsbridgeFX.com, a Canadian currency exchange that provides better rates than the banks to Canadia
