Are Commodities Holding Back the Canadian Loonie?

With the Canadian dollar seeing a range of just $0.06 versus the greenback since the beginning of 2008 – with bigger swings occurring in some single weeks last year – and oil leading commodity prices sharply higher, the largest sustained divergence between commodities and the loonie so far this cycle now exists, according to Merrill Lynch economist David Wolf.

Not only does he find it interesting that the Canadian dollar has not moved, but also that the Bank of Canada has said little about this biggest divergence since 2002, including in its recent Monetary Policy report.

Why? Probably because it doesn’t expect it to last, Mr. Wolf told clients. Bank of Canada forecasts call for non-energy commodities to fall 15% in the medium term, with oil futures implying a similar decline in energy prices, he noted, adding that the loonie is also expected to remain near C$0.98.

“The loonie’s failure to fly may in fact be telling us something about the sustainability of commodity prices at current levels,” Mr. Wolf said, noting that many commodity-related equities have failed to keep up with surging spot prices. As a result, he suggested that the divergence may end up being reconciled via lower commodity prices rather than a higher currency.

Comments

[Football Geek]

Canada has a small economy, even with all the oil reserves. What
the US dollar does has a bigger impact on where the loonie is
headed. Yes the fundamentals are good, but the US dollar is
going to come back, and the loonie will be below 90 cents in the next twelve months or so

[enviro111]

Canada continues to lower its interest rates even though its economy is booming and its trade surpluses are massive. Its the low rates that are keeping the loonie down, not speculation on the movement of oil.

The Canadian politicians just can't live unless the country runs massive trade surpluses with the USA and has a weak loonie.