Canadian Dollar Unlikely to Hold "Petro Currency" Status Gains

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"The Canadian dollar is acting like a petrocurrency once again, but we don’t think this will last," says Karl Schamotta, Chief Market Strategist at Corpay.

The call comes amidst a rally in the value of the Canadian Dollar that is linked to rising oil prices that follow a significant escalation in the war between Israel and Iran (directly, and via the Iranian proxies of Hizbollah and Hamas).

CAD upside reflects a view amongst traders that Canada has strong linkages to oil owing to it's significant oil sector. However, the linkages have weakened over recent years, and CAD's status as a petro currency has faded.

But it appears to be tracking oil again and is being described as a petro currency once more in the wake of recent events.

"The Canadian dollar is acting like a petrocurrency once again, but we don’t think this will last," says Schamotta.

Schamotta explains CAD price action in response to oil's rise fits a long-standing pattern in which oil price shocks are translated into currency market reactions through a muscle-memory process on trading floors, but doesn’t reflect a changed fundamental backdrop.

"The U.S. is itself now a major energy producer, meaning that the greenback no longer exhibits a negative correlation with oil prices, the Canadian energy sector is no longer the recipient of massive inward investment, and Canada’s economic fundamentals remain consistent with a monetary easing trajectory that matches - and even exceeds - the Federal Reserve's," says Schamotta.

"Gravity might soon reassert itself," he warns.

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The Canadian Dollar has also acted as a proxy for the U.S. Dollar for much of 2024, forming a 'North American bloc' with its southern neighbour.

That the two are moving in tandem can be explained by the tight fiscal and economic ties that underpin CAD and USD, and a belief amongst markets that central bank policy will be closely aligned as a result.

The Dollar has rallied amidst the recent geopolitical upheaval, as we would expect this 'safe haven' currency to do.

It could simply be that CAD is hitching a ride on the USD's coattails and is not seeing its petrocurrency status restored.