In the past, there has always been a noted relationship between both the price of crude oil and the USDCAD exchange rate.  The reason for this stems from the fact that Canada maintains the status of being a main producer and exporter of the world’s crude oil and natural gas.  As of June 2009, the world’s eleventh largest economy is ranked in the top ten producers and exporters according to the US Energy Information Administration.  As a result, the underlying currency will ebb and flow with the increase (or decrease) of foreign trade of the commodity.  This connection ties the Canadian currency to the commodity and will likely continue to remain intact as crude oil prices climb.  Incidentally, commodity analysts continue to forecast higher oil prices in the near future with further advances above $70 in 2010, fueling bullish speculation for the Loonie.

Oil Exports Look To Boost GDP

Analyzed over and over again the relationship between the crude oil commodity and the underlying currency continues to exist.  If crude oil prices rise, USDCAD will move lower.  Although there has been a rather destabilized uncoupling of the two since the financial debacle struck in the end of 2008, the pairing seems to be on the mend.  Once as high as 0.80, the coefficient has dipped to as low as 0.50 in the first six months of 2009.  A coefficient of 1.0 means that both commodities move in lockstep with each other.  Now, recent analysis of the correlation has the coefficient moving higher, now approximately at 0.60.  Simply put, as the relationship between both assets grow stronger and stronger, the likelihood that the Canadian dollar will continue to appreciate as crude oil prices rise increases.

Growth Prospects Continue To Remain Bright

Although economic data has not been as positive as some would have hoped for in the Canadian economy in recent quarters, a silver lining does exist.  Recent strength in construction and some services sectors have increased the likelihood of a solid recovery in the country as central bankers continue to forecast weaker inflation in the near term.  To be exact, policy makers are looking at deteriorating price increases through till the end of the year.  This in turn, will further support currently accommodative monetary policy.  As recent as last month, key officials have noted that benchmark rates of 0.25 percent will remain low for some time in order to spur further growth activity in the economy.  Subsequently, the relatively loose economy policy has sparked some buying on the consumer side – core retail sales have picked up positive for three months out of the last five.  With a solid base for growth, and optimism even from the IMF of double digit growth in 2010, the Canadian economy looks to rebound handsomely and push plenty of demand for the local currency.

A Look Ahead

As a result, traders will be looking ahead to this week’s GDP figure set for release at the end of the week.  Although monthly figures aren’t expected to be optimistic, forecasts are set for a deeper 30 day contraction in economic health, the overall quarterly advance numbers look promising.  Already revised higher from a contraction of 6.1 percent, the Canadian economy is expected to show a mere contraction of 1.3 percent.  With a rebound imminent, the positive figure will all but show the market that Canada is set for a quicker rebuild than the world’s largest economy, boosting the underlying Canadian dollar.

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