Canadian Dollar Strengthens as Prices of Oil and Exports Rise

Against its US counterpart, the Canadian dollar showed strength with the recent rise in oil prices that also resulted in a solid gain for the nation’s exports.

The data published by Statistics Canada indicated that the country’s trade deficit almost doubled in May (CAD 1.09 billion or USD 846 million). However, it is also signaling of economic strength as both exports (48,686) and imports (49,772) reached record highs. The statistical resource page presented the total exports and imports for the previous period to be at 48,052 and 48,604 respectively.

“The Bank of Canada will probably take some comfort from indications that export growth is holding up,” said Paul Ferley, Royal Bank of Canada assistant chief economist.

Speculation about an increase in interest rates as soon as next week rises as officials from the Bank of Canada expressed in June that a pair of rate cuts two years ago had cushioned the economy from the massive collapse in oil prices worldwide. A large part of the country’s US dollar income comes from the sale of oil and other energy-based goods not only in America but in the rest of the world. Crude oil is also the largest single contributor of foreign exchange in Canada, which is increasingly affected by the growth of oil sands.

At present, the price of crude oil has recovered some ground after a surprising rise in US demand, which was previously halted by a steep slide. However, the possibility of an oil oversupply in 2018 has prompted oil companies to cut their price forecasts. Goldman Sachs released a report that new production projects and a new shale boom will be the key drivers for the boost in oil output by a million barrels per day up until 2019.

“2017-19 is likely to see the largest increase in mega projects’ production in history, as the record 2011-13 capex commitment yields fruit,” according to research by the US investment bank.

Last week, the Canadian dollar traded at CAD 1.2935 (USD 1.0043), which is up by 0.2%. It then traded in a range of CAD 1.2924 to CAD 1,2984, with the strongest at CAD 1.2912 during the fourth of July celebration (the highest since September 2016).

While the currency is showing strength, Forex strategists foresee the loonie dropping over the coming months due to the recent expectations that higher interest rates will run out of steam and due to the weight of lowering oil prices. Macquarie predicts the currency to drop to 65 cents US in the next 12 months after a rough 2016.

This will prompt CAD/USD forex traders to sell, as the more the Canadian currency devalues against the US dollar, the higher they can profit to avoid increase in losses. FXCM recommends trading forex based on where the currency value is heading, since the exchange rate fluctuates continuously making it difficult to make concrete decisions based on intuition alone.

The loonie has been on a rollercoaster ride since the election of US president Donald Trump along with an OPEC agreement to cut oil production.

While the exchange rate can be moody, chief agricultural economist J.P Gervais suggests taking advantage of a weak Canadian dollar from a business perspective once it happens again. The low value of CAD can make the nation more competitive in foreign markets, undercutting other exporting countries, as the cost of doing business tends to go up.

“The lower the loonie is, the better it is for the [agriculture] sector,” said Gervais. “As the loonie goes down, that makes fertilizer prices, fuel prices more expensive.”