US Dollar to Canadian Dollar closed at 1.3377 last week, November 25, 2022. The USD/CAD is at two-month lows as crude prices fall in the global market.
Canadian Dollar Drops on Low Crude Prices
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Lower crude prices affect the Canadian currency negatively. Expectations of a price cap on Russian oil from Western countries brought down crude prices. Chinese demand for crude oil has dropped as covid cases are at a record high in the country.
The USD/CAD exchange rate has a high correlation to crude prices. Loonie, the Canadian Dollar is oil-sensitive, and low prices affect the CAD negatively. Investors fear that a drop below $80 will cause a surge in the USD/CAD above 1.35 levels. The USD/CAD currency prices were below 1.30 when crude prices were trading higher. The recent drop in prices pushed the USD/CAD above 1.33. If crude falls below $80, the Canadian Dollar will weaken further. Low oil prices mean fewer US Dollars to the Canadian economy.
The USD/CAD rose to a two-year high of 1.39 in October in the forex market. The US Dollar to Canadian Dollar has support at 1.3250 levels. A drop in crude prices will cause a surge in the USD/CAD currency pair to CAD$ 1.35 levels at a rapid speed.
G7 Price Cap on Russian Oil
Russia is the largest exporter of crude oil. The conflict between Russia and Ukraine has led to a supply chain crisis in crude and food grains in the global markets. .
The war between the two countries is on for more than nine months. Prices of food grains and crude have surged higher. Ukraine garnered support from Western countries. But, President Vladimir Putin refuses to quit his war on Ukraine, despite efforts from the West to bring down the conflict.
The US, the UK, and the EU support Ukraine in its war against Russia. Western countries support Ukraine by slapping sanctions on Russia. They intend to bring a price cap on its crude oil. It will reduce revenue to Kremlin. It will lower crude prices and disturb the Russian economy, while benefitting the Western countries.
G7 nations propose to bring a price cap on Russian oil of $65 to $70 per barrel. Energy prices have hit households and businesses around the world. High energy prices are driving inflation higher, causing prices to rise sharply. The price cap on crude is expected to come into effect from December 5. Lower crude prices will affect Russian revenue as it depends on crude exports.
However, there is another side to the coin. If Russia retaliates and lowers production, it would lead to an increase in fuel prices. It will result in an energy crisis that would drive inflation higher. Western countries like the US, UK, and Germany are trying to bring down inflation, and such an act from Russia will drive fuel prices higher, warn experts.
Poor Demand from China Drags Crude Prices Lower
China is the top importer of crude oil. But crude imports have come down with the rise in covid cases. Covid infections reached a record high on Friday, putting the country under severe lockdown restrictions. Travel restrictions taken to control the covid outbreak have lowered the oil demand.
The Canadian Energy Research Institute (CERI) states economic growth in Canada will come down from the drop oil prices .
Activities in Canada
Manufacturing PMI dropped to 48.8 in October from 49.8 the previous month in September 2022. It is the second month of contraction as factory activities fell in Canada. Production dropped as new orders fell. There is a supply-chain crisis as the lack of raw materials impedes economic activities. Ivey PMI reading, a leading economic indicator, dropped from 59.5 to 50.1. Manufacturing sales month-in-month rose 2% in October 2022. Food, petroleum, and coal product industries showed the highest increase.
The trade balance widened in September to 1.1 billion from a revised surplus of 0.6 billion in the previous month. Retail sales month-on-month declined from 0.4% to -0.5%.
Employment change jumped from 21.1k to 108.3 k. However, the unemployment rate of 5.2% is lower than the expected 5.3%.
CPI month-on-month dropped from 0.1% to 0.7%. Bank of Canada brought a steep hike in interest rates. The cash rate is 3.75%. In the December meeting, there are expectations of another rate hike by 25 basis points as high costs affect the spending capacity of the people.
Inflation is at 6.9% in Canada. High prices affect the livelihood of people in Canada. Meeting expenses is a strain on families and businesses, as high commodity prices affect the lifestyle and spending capacity of the people.
US Dollar Index at Two-Month Lows
The Dollar index slipped to two-month lows and closed at 105.917 on Friday, November 25, 2022. The Fed had aggressively raised interest rates to curb inflation. But the Fed now intends to slow down the rate hike pace. It has brought the USD index below 107 levels.
If the greenback loses steam and continues its downward fall, it may lower the volatility in the USD/CAD prices.