Canadian Dollar Doesn't Like Oil Price Shocks shows Research from NBC
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- CAD temporarily spiked in line with oil prices
- Gains now almost fully returned
- Correlation may not be as strong as thought
Oil production cuts caused by the recent drone attack on Saudi Arabia may not be outright bullish for the Canadian Dollar according to analysis from National Bank of Canada (NBC).
The Canadian Dollar is one of the currencies considered to be highly correlated to the price of oil owing to the large amount of oil produced by Canada, which is a primary foreign exchange earner.
The last comparable event to the drone attack on Saudi oil fields over the weekend was the invasion of Kuwait by Iraq in 1990, when Iraq subsequently took Kuwait oil production offline.
On that occasion oil prices "doubled over two months," says Sandra Kagango a foreign exchange analyst with NBC's Financial Markets unit; noting that in response the Canadian Dollar appreciated +1.4% in the following 20 days.
It then depreciated thereafter on the 'risk off' tone adopted by investors as tensions escalated before eventual U.S. intervention in mid-October.”
This suggests the currency is not as highly correlated to the commodity as some had thought, particularly when oil price spikes are driven by geopolitical shocks.
The drone attack knocked out half of Saudi Arabia’s oil supply, and the gulf state alone provides 10% of the world’s oil - half of that is 5% of total global production.
As a consequence, oil prices spiked up by almost 15% according to some market reports - although they have since fallen back down.
WTI Crude rose from $55 to a peak of circa $63 according to data from Trading View. Since then it has fallen back down to $59.05 at the time of writing - about the midpoint of the rally.
There was a clear reaction from the Canadian Dollar on Monday morning when it spiked up as traders returned to their desks, although since then it has almost given back all its gains.
The Pound-to-Canadian Dollar exchange rate fell from a pre-attack close of 1.6617 to 1.6415 on Monday morning, but since then has risen back up to 1.6560.
The U.S. Dollar-to-Canadian Dollar exchange rate, meanwhile, is trading at almost the same level it did before the attack (1.3284 versus 1.3290) suggesting a swift end to any CAD oil-related appreciation.
“Whilst the market is still unclear on the outcome of the attack, and just how quickly output will be fully restored, production cuts (even if they are last months) might not be outright bullish for the Loonie, especially if tensions remain high,” says Kagango.
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