TORONTO - A tight relationship between the Canadian dollar and the price of oil has come back into play, though not as strongly as in recent years, and a further drop in crude prices would apply more pressure on the struggling currency.
U.S. crude oil fell to as low as $100.10 a barrel on Thursday, down around 33 percent from its all-time high of over $147 a barrel in mid-July.
As oil prices probed that daily low, the Canadian dollar touched C$1.0821 versus the U.S. dollar, or 92.41 U.S. cents, its weakest level in nearly 13 months.
The currency has fallen 7 percent since oil began to slide from its peak, and economists see no reason for that pattern to change.
"We do expect the Canadian dollar to continue to fall in response to these commodity price declines," said Eric Lascelles, chief economics and rates strategist at TD Securities. "We have targeted C$1.10 by year-end, which is consistent with the idea that oil will go a little bit further as well."
Canada is the largest exporter of oil to the United States and the oil sands in Northern Alberta contain the largest crude deposits outside the Middle East.
Much of the nearly 60 percent run-up in the Canadian dollar between 2002 and late 2007 was in line with rising oil prices. But that connection loosened this year as the price of U.S. crude oil skyrocketed, leading many to believe speculation was behind the move, rather than fundamentals.
"It's almost as if the foreign exchange market was highly skeptical of the surge in crude," said Doug Porter, deputy chief economist at BMO Capital Markets.
He noted that the price of crude is still above where it started the year, while the Canadian dollar down over 8 percent, so the currency has reflected the pullback in oil prices. But he said there are other factors in play as well.
Lately, the main driver of all major currencies, including Canada's, has been broadbased U.S. dollar strength.
As concerns of weakening economic growth abroad, stoked by high energy prices, overtook North American growth concerns, the greenback came back into vogue among investors and rebounded from a multi-year decline.
Another key factor in the Canadian dollar's weakness this year has been the interest rate outlook, which has also been affected by oil prices.
The Bank of Canada dropped its key lending rate 150 basis points between December and late-April in an attempt to spur economic growth in light of a softening economy in the United States, which absorbs more than three quarters of Canada's exports.
But as oil prices surged, inflation concerns overtook growth fears, and some in the market began to forecast Bank of Canada interest rate hikes in the coming quarters.
In the end, oil prices near $150 were not sustainable and the market moved back to its focus on the weakening economy, undercutting the potential support of higher interest rates for the Canadian dollar.
While the trend is still weaker than it was a couple years ago, the price crude is still a factor in determining the direction of the Canadian dollar, said Matthew Strauss, senior currency strategist at RBC Capital Markets.
"There are days, like today, where it becomes the dominant driver," he said
U.S. crude oil fell to as low as $100.10 a barrel on Thursday, down around 33 percent from its all-time high of over $147 a barrel in mid-July.
As oil prices probed that daily low, the Canadian dollar touched C$1.0821 versus the U.S. dollar, or 92.41 U.S. cents, its weakest level in nearly 13 months.
The currency has fallen 7 percent since oil began to slide from its peak, and economists see no reason for that pattern to change.
"We do expect the Canadian dollar to continue to fall in response to these commodity price declines," said Eric Lascelles, chief economics and rates strategist at TD Securities. "We have targeted C$1.10 by year-end, which is consistent with the idea that oil will go a little bit further as well."
Canada is the largest exporter of oil to the United States and the oil sands in Northern Alberta contain the largest crude deposits outside the Middle East.
Much of the nearly 60 percent run-up in the Canadian dollar between 2002 and late 2007 was in line with rising oil prices. But that connection loosened this year as the price of U.S. crude oil skyrocketed, leading many to believe speculation was behind the move, rather than fundamentals.
"It's almost as if the foreign exchange market was highly skeptical of the surge in crude," said Doug Porter, deputy chief economist at BMO Capital Markets.
He noted that the price of crude is still above where it started the year, while the Canadian dollar down over 8 percent, so the currency has reflected the pullback in oil prices. But he said there are other factors in play as well.
Lately, the main driver of all major currencies, including Canada's, has been broadbased U.S. dollar strength.
As concerns of weakening economic growth abroad, stoked by high energy prices, overtook North American growth concerns, the greenback came back into vogue among investors and rebounded from a multi-year decline.
Another key factor in the Canadian dollar's weakness this year has been the interest rate outlook, which has also been affected by oil prices.
The Bank of Canada dropped its key lending rate 150 basis points between December and late-April in an attempt to spur economic growth in light of a softening economy in the United States, which absorbs more than three quarters of Canada's exports.
But as oil prices surged, inflation concerns overtook growth fears, and some in the market began to forecast Bank of Canada interest rate hikes in the coming quarters.
In the end, oil prices near $150 were not sustainable and the market moved back to its focus on the weakening economy, undercutting the potential support of higher interest rates for the Canadian dollar.
While the trend is still weaker than it was a couple years ago, the price crude is still a factor in determining the direction of the Canadian dollar, said Matthew Strauss, senior currency strategist at RBC Capital Markets.
"There are days, like today, where it becomes the dominant driver," he said
