Why is CAD trading at such low levels?

Current levels on the Canadian dollar are hovering around 13-year lows and since the autumn of 2012 the loonie has shown a steady decline with very few signs of a fight back. CAD is significantly correlated to oil prices and has been for some time due to the fact that the sale of crude oil is where the majority of its US Dollar income comes from, with roughly 97% of Canada’s crude oil exports going to the US. With oil prices also witnessing a long-term gradual decline, CAD has been under significant pressure due to the following reasons.

When oil prices are high, Canada earns more USD on every barrel of oil exported resulting in a higher supply of USD in relation to Canadian dollars, which in turn pushes up the value of the CAD. Alternatively, when the oil price is low the supply of USD relative to Canadian dollars is lower resulting in a weakening loonie when compared to the USD.

The correlation between the two sits at 0.78 to the power of 1 when we compare the two from January 2005.

Will the negative trend continue?

The loonie has shown signs of a rebound this week, mainly down to USD weakness and an oil rebound as both OPEC and non-OPEC consider a co-ordinated cut in production. Should oil continue this uptrend I would expect the CAD to follow suit due to the reasons previously stated. With Canada’s dependence on oil exports increasing in recent years (partly due to the increase in oil sands production), it finds itself at the mercy of bigger players in the oil production market such as Saudi Arabia and Russia who may not decide to cut production in order to increase the value of oil due to fears of losing out on their market share.