OTTAWA, O.N. – According to currency strategists, the Canadian dollar’s tight link with the price of oil, which broke down in September, won’t likely see a realignment until after both the American election and a possible interest rate hike by the Federal Reserve.
Canada exports a large amount of oil, hence why our dollar is often referred to as a petro-currency. Despite this, the Canadian dollar weakened to a six-month low of 75.5 cents against the U.S. dollar last Friday, despite OPEC announcing a deal to limit production, lifting the price of oil above US$50 per barrel.
The last time that oil climbed above US$50 a barrel in early June, the dollar was trading at close to 79 cents US.
In an article by Reuters, BMO Capital Markets’ head of global foreign exchange strategy Greg Anderson says that other fundamentals, including the interest rate differential and the Trump premium are part of that.
Republican presidential candidate Donald Trump has said he would renegotiate or scrap the North American Free Trade Agreement if elected, posing a risk to the Canadian economy.
The weaker relationship between the Canadian dollar and oil will continue until after the U.S. election and until the Federal Reserve raises interest rates, said Jack Spitz, managing director of foreign exchange at National Bank Financial.
Markets have priced in about a 70 per cent chance of a Fed hike in December, helping to push the U.S. dollar on Thursday to a seven-month high against a basket of major currencies.
The Bank of Canada is said to be on hold when it comes to changing rates until 2018.
Story courtesy The Financial Post/Thomson Reuters: http://business.financialpost.com/news/economy/canadian-dollar-link-to-oil-price-seen-broken-until-after-u-s-election-fed-rate-move?__lsa=81b9-435b.