Last week the Canadian dollar climbed to a four week high against the USD to $0.78 as crude oil prices increased nearly 20% for the month. Yet the loonie does not always increase at the same pace as oil. The relationship between the Canadian dollar and oil declined to an .
What’s behind the recent disconnect between the loonie and oil?
There are two major factors that explain the value of the CAD/USD exchange rate:
- The price of crude oil: While oil has rebounded lately, an abundant oil supply and slowing demand are likely to keep a lid on oil prices for some time.
- The relative difference in the health of the Canadian and U.S. economies: Different strengths will lead to diverging paths in interest rates, which ultimately impact the currency values.
Currently, a different economic outlook between Canada and the U.S. is the major influence on the value of the Canadian dollar.
The oil and loonie outlook for the remainder of 2016
There are a number of key events to watch that could impact the value of the loonie over the coming months:
1. Potential production cap by OPEC:
(Organization of the Petroleum Exporting Countries) members are planning to hold an informal meeting during the week of September 26, 2016, to discuss ways to stabilize the crude oil market. OPEC has a mixed track record when it comes to controlling output. Disagreements between Saudi Arabia, Iran, Iraq and Russia can easily arise and crush plans to cut output to raise prices.
2. Increase in interest rates by the U.S. Federal Reserve:
There’samongst U.S. Federal Reserve committee members that a rate increase may be appropriate later this year. However, the market is currently anticipating only one rate hike between now and the end of 2017. Varying economic opinions about future interest rate hikes in the U.S are not uncommon, even within our own team.
Exchange rate important to monitor
Our current forecast calls for the loonie to average $0.77 for the remainder of 2016 while crude oil prices are projected to remain around $45 USD. A low Canadian dollar has played an important role in shielding Canadian operations from the farm income downturn in the U.S. The loonie is expected to be a positive driver of profitability for crop and livestock operations moving forward.