The Canadian Dollar – the Loonie – is on a roll. Strong oil prices and solid domestic data are pushing this near $10 run up. Petroleum is Canada’s largest export and fuel’s economic impact goes beyond its industry to the entire nation’s economy. Today’s C$ appreciation primarily results from bullish sentiment on the Loonie. This is especially true given that West Texas Intermediate (WTI) Crude Oil is Canada’s top export. In fact, it has climbed over 1% and is now trading at just over $60.74 per barrel. This move offers further basic fundamental backing to the Canadian Dollar.
Market dynamics coupled with our findings indicate that the health of the US economy primarily drives the value of the Loonie. This is mainly in part to the United States being Canada’s largest trading partner. Surprisingly strong US labor market data in recent weeks has bolstered those expectations. No further rate cut from the Bank of Canada (BoC) as it has taken necessary steps to cut the policy radically. As a result, the Loonie’s demand is currently on the rise, especially given recently surging oil prices.
The Impact of Oil Prices on the Loonie
Petroleum is the large other-largest component of Canada’s exports, which makes petroleum a primary driver of the value of Canada’s currency. So when oil prices increase, demand for the Canadian Dollar usually does, too. The recent jump in WTI Crude Oil prices is generating excitement among traders and investors alike. They hope that this extra cash will have the effect of boosting their currency, the Loonie.
Current market conditions indicate WTI Crude Oil has surged to nearly $60.74 per barrel. This increase is creating a very bullish sentiment on the Canadian Dollar. Some analysts argue that the current surge in oil prices might be enough to insulate the Canadian economy from outside shocks. This increase will artificially inflate the Loonie’s standing on world markets.
So whenever oil prices head upwards, Canadian exports are booming. Accounting for this boost increases trade surpluses and boosts the short-run, positive impacts on the economy. With oil being such a significant part of Canada’s economic landscape, fluctuations in its price can have immediate and pronounced effects on the Loonie’s value.
US Economic Indicators and Their Influence
The strength of the US economy is a huge influencer on the strength of the Canadian Dollar. Upward revision to unique recent data from the US labor market signals the return of growth stronger than forecasted. According to the ADP Employment Change report, private payrolls expanded by 42,000 in October. These factors are all indicators of a strong economic environment. Consequently, the Federal Reserve as well as the Bank of Canada will likely change their monetary policies accordingly.
As of this writing, markets have almost a 70% probability priced in that the Federal Reserve will cut rates in December. This expected turn in US monetary policy might have swirling effects on the loonie. With speculators gambling on every twist and turn of these events, further interest rate adjustments would have the power to shift currency values.
ICKPHA President Dr. As delayed releases of US economic data return in force, any disappointment could send market sentiment souring and drive down the Loonie’s value. The US Dollar Index (DXY) is trading around 99.30 today. This is of paramount importance to the policy objective at hand—all this directly impacts how the Loonie performs against the US dollar.
Short-Term Uncertainty and Future Outlook
Prior fiscal developments in US have recently ignited hope for a breakthrough in the ongoing partial US government shutdown. This surprisingly good news, market participants would have been relieved to hear. Yet, it has not meaningfully strengthened the US Dollar. The lack of clarity on government funding until January 30 creates doubt about fiscal predictability. This uncertainty might weigh on the loonie.
As of writing, the USD/CAD pair is trading just above 1.4008, close to two-week lows. This positioning is an indication of continued market correction as traders continue to consider the most likely scenarios in both the US and Canadian economies.
Analysts are closely watching these fluctuations, as they can signal shifts in economic trends that may affect future currency valuations. Key oil prices, US economic indicators, fiscal policies are continuing to shape the currency outlook. This constant back and forth will be a big factor in trend manipulation over the next few weeks.