Following the OPEC agreement back in November, crude oil has been on a downward trend with some analysts predicting oil to fall as low as $30 in Q2. Oversupply and the invention of shale oil continues to drive the barrel down, despite an apparent agreement amongst the 13 OPEC members.
The Canadian Dollar could suffer from a fall in oil prices as one of its largest exports, the correlation between the Canadian Dollar and oil prices remains strong.
Short term weakness for CAD?
The Canadian Dollar has managed to hold on to most of the gains against Sterling since its post-Brexit highs back in September, due in most part to the ongoing Brexit uncertainty and the now apparent case for a hard Brexit. Whilst normal circumstances would dictate weaker oil prices and a weaker CAD against Sterling, the political and economic risk associated with Brexit fair outweighs the risk associated with lower oil prices. In fairness, the Canadian economy has had a good start to 2017, following positive housing builds and change in employment.
Against the US Dollar, CAD is sitting at a weekly low as the US President-elect Trump assumes office tomorrow. With oil prices down 2.75% within the last month there are further reasons to believe the pair will continue south as we approach February. The currency markets have the prospect of 3 US interest rate hikes this year, and with Trump’s pro business stance the FED may have to play catch up sooner rather than later.
GBP/CAD back below 1.60?
The recent Pound rally following Theresa May’s Brexit plans is in my view, short lived and once Government invoke Article 50 in March, the Pound is likely to face further blows. Whilst her plans offer a level of certainty and clarify around the Brexit debate, the prospect of a hard Brexit could have significant implications for the UK economy. Appetite for the Pound will fall in my opinion, and we may see rates in the mid to low 1.50’s which were last witnessed in March 2013.