Crude Oil prices are down, and the Canadian Dollar – CAD – is taking a huge blow on its face. The WTI Crude Oil has slipped below $74 per barrel. While Canada experienced a bump in Housing Starts in October, the market sentiments are down with the US Initial Jobless Claims.
Interestingly, it is history repeating itself, with the previous such instance dating back to late March 2022. The US Oil prices were down by 8%, and CAD was dancing in the range of 1.2474 and 1.2567 against the greenback. That was a 0.7% weakness. It goes on to establish how commodity markets can hamper the movement of CAD against USD.
Crude Oil’s Role
The Canadian Dollar again suffered the consequences in November last year. It went as low as 1.3390 for a slip of 0.5%. The weakest level since November 10, 2023, was 1.3409. When the loonie fell by 1%, it broke the streak of 4 weeks. Another major oil producer, Norway will post a larger decline among the G10 currencies.
Circling to the incident in March 2022, it was inevitable for CAD to recover with oil prices despite how the graph moved on the commodity price index. Demand from China grew weaker when Shanghai locked down the region amid the COVID-19 crisis.
CAD takes a hit also because OPEC member countries exported the product more than it was exported. That sent shock waves across the Crude Oil segment, affecting the loonie.
Factors Behind Decline
Crude oil prices have come down due to some factors. These include – geopolitical events, global economic conditions, and other relevant influences. These have been underlined as follows:
- Political conditions can be best understood by the terms respective Governments maintain with each other. For instance, a hiccup between Canada and India affected the Visa issuance in both countries. The better the ties, the better it is to negotiate a favorable term.
- Economic conditions were badly affected during the COVID-19 pandemic. This was to the extent that many countries nearly touched recession. This is evident because countries are still working to escape those cold shivers.
- Supply and demand are other factors that affect the decline in prices of crude oil. An expected decline from China affected CAD when the prices surged to make a recovery ahead of time.
A limited supply of Crude Oil, or any product for that matter, kicks up the price and the currency involved in securing the deal. Here, it is CAD, and any impact on the supply will eventually have a ripple effect on the loonie.
Canada Dollar’s Winning Streak
The Canadian Dollar has seen a couple of streaks before. The USD/CAD took back the 1.3700 handle as of Thursday. A fresh run is of 1.3800 before dipping to 1.3654.
This comes as the US Initial Jobless Claims inch to their peak in the last 2 years. The forecast was 213k, but it was surpassed by 231k claims for the week of November 10. CAD’s winning streak has been noted two times in the last year. It was, before that, registered in June 2020 when the market’s mood turned sour.
It has not precisely gone below the 1.3 mark against the greenback. The strongest was 1.3311, while the currency was 1.3% weaker.
Immediate Impact on CAD
A fall in the price of Crude Oil fetches undesirable results for CAD. Thereby affecting the CA currency performance. An ideal explanation extends in a way that the loonie would be less favorable if its linked product is not up for sale per the estimates. A higher demand for the linked product means the currency is up for business.
It goes back to the fundamental principle that the price will increase if the demand increases. Here, it means the currency will be stronger if it moves more across the border.
- The higher the demand for crude oil, the stronger the Canadian Dollar.
- The lower the demand for crude oil, the weaker the Canadian Dollar.
The impact is indeed immediate, but a prediction can be estimated by studying international markets and the geo-political environment.
A fall in currency value affects any industry or enterprise that majorly deals in exports and imports.
The movement of CAD slips posts a gloomy industrial picture and affects how the international market looks at it for trading purposes. The loonie getting weaker fetches a lower value to the exporter as the opposite party sees no effect in any manner.
Crude Oil prices and CAD are directly proportional. The CA currency performance is better when demand is abundant. The loonie is likely to get its streak back and gain decent value. Crude Oil prices may take time to hit the high wall amid prevailing political and economic conditions.