Thoughts

March 11, 2022 | 15:01

No Love for the Loonie, Yet

Economist

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

The last time WTI oil prices averaged $100 in a month (July 2014) the Canadian dollar was at C$1.074 or 93.1 U.S. cents. So far in March 2022, oil has traded above $100 in all nine trading days. Meantime, the loonie remains all but stuck in the mud sitting around C$1.27 or 78.7 U.S. cents. The lack of traction in the Canadian dollar despite the surge in oil prices has been a consistent question from clients in recent weeks.

Here are a few potential explanations of why the C$ has traded so poorly:

There’s little, if any, international interest to invest in the Canadian oil patch. In fact, the past few years have seen foreign capital consistently exiting the oil sands. Given the challenges in building new pipelines and the ESG movement, it’s unlikely we’ll see a sea change in opinion back in favour of the oil sands.
The U.S. is a much larger producer of oil than a decade ago. Oil production was already ramping up in 2014, but at 11.3 mbpd in the latest week, that’s nearly 50% higher than in July 2014. The relative benefit to Canada just isn’t as large as it once was. It’s also worth noting that the trade-weighted C$ excluding the US$ isn’t far from levels seen about a decade ago.
In the post-GFC period, the U.S. was stained by the financial crisis, prompting global investors to look for other safe havens. Indeed, there was a broad move into Canadian dollar assets by global central banks in the years after the GFC. That’s just not the case in this cycle, with the US$ outperforming in the latest risk aversion move.

There are undoubtedly other factors influencing the currency as well, but those are some big themes. Even so, the surge in oil and broader commodity prices will push the merchandise trade account into a sizeable surplus in the coming months. If commodity prices stay at these levels (or even close to them), the widening current account surplus should act as a positive for the loonie over time. As an aside, note that the BoC’s non-energy commodity index is at a record high, so it’s not just oil that’s benefitting Canada. Perhaps the market is just waiting to see if the jump in commodity prices is more than just a flash in the pan. If they are, there appears to be plenty of upside for the loonie, even if a run at parity seems extremely unlikely.