Canadian Dollar Under Pressure as Oil Prices Fall

The Canadian Dollar (CAD) did not particularly perform well last week relative to its major rivals, with losses against the US dollar (USD), the euro (EUR), and the pound sterling (GBP).

Poor economic data that pointed to a slowdown in the economy as well as the early drop in oil prices pushed down the CAD. The weak GDP growth of 0.01% in September preceded October’s flat number. On the plus side, wage and pay pressures appear to have subsided as well.

As a result of decreasing oil prices, Canada’s third-quarter current account deficit of 11.1 billion Canadian dollars was back at record levels. As anger in China over the “COVID Zero” policy grew worse in the early half of last week, oil struggled and fell to its lowest point since December 2021.

The announcement that OPEC+ may further reduce production when they meet this weekend has helped oil prices recover. A further drop in output is likely to raise oil prices and, in consequence, the Canadian dollar during the OPEC+ meeting on Sunday.

BoC’s Interest Rate Decision Shackling Canadian Dollar

In other news, a difficult choice must be made by the Bank of Canada (BoC) at its upcoming policy meeting on December 7.

Even while Governor Tiff Macklem has insisted that additional rate increases are necessary to get inflation under control, the central bank has come under fire from a number of significant stakeholders.

Although there are indications that the economy is slowing down, Governor Macklem would not consider it advantageous to reduce rates by 25 basis points at this time because the US Federal Reserve is anticipated to keep raising rates, albeit more slowly.

This year, the Canadian dollar has struggled against the US dollar; a break now or a 25 bp increase could leave the loonie exposed to significant losses versus the US dollar in the coming months.

Meanwhile, the unemployment rate dropped to 5.1% in Friday’s jobs report, while the number of job changes exceeded expectations, coming in at 10.1K, adding to the Bank of Canada’s problems. A likely 50 basis point increase by the Bank of Canada may be justified in light of the strong job figures.