Canadian Dollar Falls v Pound as Brent Hits New Low

The Canadian dollar has registered losses as crude oil prices keep on weakening. The commodity has set a six-year low at 37.50.

WTI crude is hovering around 38 on Tuesday morning while brent crude prices are just above 6 year lows and seen just above 41 USD a barrel - dynamics even the most stubborn CAD bulls cannot ignore and we see this as being the immediate driver for the currency at the present time.

The GBPCAD is seen trading at 2.032 on the inter-bank market while retail banks are actually seen quoting in the late 1.90’s for international payments.

Independent currency providers are offering better rates above 2.0 with RationalFX quoting around 2.050, a sizeable advantage for large payments.

The USD/CAD rate meanwhile resumes its longer-term uptrend having tapped 1.35 in the session.

"The lack of agreement between the members is symptomatic of an increasingly toothless cartel. With WTI struggling to retake the $40p/b threshold, early session USD CAD impetus is gradually chewing through layered offers ahead of the highs of the year," says Jeremy Stretch, analyst at CIBC.

However, Stretch offers a glimmer of hope for the Canadian unit pointing out that net CAD shorts extended for a fourth week in five into the start of December, well beyond the one-year moving average. "This may suggest that amidst a relatively a mature USD uptrend, we may soon be nearing a USD CAD peak."

USD/CAD's bullish momentum is still very strong as resistance at 1.3457 has been broken. Significant support stands at 1.3225. "The exchange rate is expected to show continued bullish momentum as uptrend is still in play," says Yann Quelenn at Swissquote Bank.

Oil Price Recovery... in the Distance

Oil is a key component of the Canadian commodity-based sector with the overall basket contributing around 27% of the total value of Canada's GDP.

Canada is one of the only developed nations that exports energy - oil therefore matters to the country's finances and therefore currency.

At OPEC's 168th conference in Vienna on Friday, the group updated its market outlook and indicated that it seeks stable and balanced markets – a disappointment for high-cost Canadian producers who hoped OPEC’s big boys may ease back on production to allow prices to rise higher.

No adjustments were made to quotas and changes in output appear unlikely related to the meeting; OPEC plans to meet again on June 2 next year, though an emergency meeting appears possible if oil prices continue to fall.

“The decision, in our view, is prudent as OPEC members, especially the "OPEC 3" are rapidly achieving the goals of last year's November meeting,” says James West at Evercore ISI.

The goals set out by OPEC are:

1) Regaining market share,

2) Removing high cost production,

3) Encouraging global demand, and 4) re-introducing risk into E&P investing. The global oil markets are methodically moving back into balance and another year of reduced investments in 2016 will lead to a longer and stronger upcycle in our view.

IEA chief Fatih Birol has meanwhile said oil prices will start to rise in 2017 and hit $80/bbl in coming years as prices below $50/bbl are “not sustainable”.

However, supply issues are likely to persist into next year. The IEA believes non-OEPC production will decline by about 600,000 bpdf next year – the largest decline since 1992.

While oil prices will inevitable rise higher the CAD may not be able to benefit if much of the sector is put out of business.

Instead, we will be watching for other elements of the Canadian economy to pick up economic growth, particularly as the United States continues its strong growth.

We see a stronger US economy as providing the tailwind to help the CAD recover notably in 2016.