The Canadian Dollar and the Price of Oil

Some research for a friend of mine yielded the following charts which I thought I would share for the benefit of those who wonder about the value of the Canadian Dollar against the American Greenback.

The price of crude oil tracked in the $90 to $100 range for quite a few years then suddenly plunged beginning in mid-2014, recovered slightly in early-mid 2015 then continued truckin' on down to where is sits today at around $30 USD (Figure 1). Western Canadian Select (WCS) crude oil trades at a discount to West Texas Intermediate (WTI) (figure 2), mainly because our "only" customer is the USA and we have no way of exporting the stuff anywhere else at the moment.

Figure 1, source Federal Reserve Economic Data

Figure 2 source Oil Sands Magazine

Figure 3 source XE Currency Charts

The Canadian dollar was trading in the USD $0.95 to $1.00 range for several years and then began a slow decline to its current value of about $0.70 (Figure 3). One of the obvious culprits is the decline in price of crude oil BUT the dollar began its decline a full two years ahead of crude, in mid-2012.

Now it is quite possible the low dollar is the fault of our new national Liberal government and I would never argue. I mean, the markets could well have seen it coming a full three years or more before last fall's election.

The truth is, if you look at figure 4, our dollar is tied to other commodities as well as oil and the commodities index began softening in 2011. As BMO's January North American Outlook put it:

. . .it could take three years before the currency even returns to 80 cents US—penance for the nation’s steady loss of competitiveness and over-reliance on resources. Since 2002, labour productivity in the manufacturing sector has grown three times faster in the U.S. than in Canada (58% versus 18%).

Figure 4 source BMO Capital Markets