The link between oil and Usd/Cad is normally easy to see, especially on a weekly basis. Recently the cad has lost the usual correlation of oil rising and the Usd/Cad going lower, and vice versa. The loss of the link was initially due to weaker economics coming from Canada, interest rate cuts, and global markets turning risk averse, (where they are buying U.S. Treasuries and bonds instead of equities). This had reduced the appeal of the oil/cad story, and strengthened the U.S. dollar against the commodity based pairs during the Sub-prime crisis, that, however, looks to be changing back again.
| Crude Oil 3 Year Chart vs... Usd-Cad Chart |
Data Source; MetaTrader4 and Bloomberg
The level of crude oil inventories determines whether oil imports need to be increased, decreased, or maintained at the current level. The inventory numbers are released each Wednesday at 10:30 EDT and there is a lot of re-alignment in response to whatever the situation is, by traders under or over-exposed to those levels.
The U.S. has an issue with the refining of oil rather than just the inventory amount. No new U.S. refinery plants have been built in decades, and most of the current sites are in the Gulf of Mexico, right in the hurricane pathway, and that can impact refining capacity, as well as the flow of the commodity, and therefore, price.
The effect of higher oil prices seeps into every single aspect of economic life and economic business cycles.
Higher oil price equates to:
Higher costs of shipping goods, therefore higher retail prices.
Higher energy costs in business and therefore an increase in PPI, and PMI numbers.
Higher gas prices and therefore an impact on consumer confidence.
There is very little in the U.S. daily life that is not impacted by oil prices and availability. Most economies are heavily reliant on oil, and until a viable substitute is found, it will be viewed, correctly, as ‘Black Gold’.
Oil trades on the New York Mercantile Exchange (NYMEX). Nymex trading hours are from 6:00pm to 5:15pm Sunday through Friday.
Most oil trades are completed by 2:30pm each day, and that is when the equity markets tend to take a sigh of relief. Oil price movements are closely watched by equity traders because of the impacts listed above.
Oil is priced internationally in US$s, a long oil position automatically creates a short US$ position, and vice versa.
Countries with natural reserves of oil, that are priced already in US$s, are moving away from also holding US$ paper (Treasury bills or dollar notes) as their currency reserve. Why have a US$ reserve in the ground, and in the bank vault too? If the US$ depreciates, both of your reserves do too. Saudi Arabia has moved to Euro Paper, and most other oil exporters are re-aligning as well.
The cad will be directly affected by the amount of oil the U.S. has in inventory. The U.S. imports the majority of its oil from Canada, so a lower than expected number may mean oil will rise, as will the Canadian dollar. A higher than expected inventory number may see oil come down in price along with a weakening of the Canadian dollar.