Oil Sinks In 2015 (And So Does The Loonie)

It’s near the end of the year…
With the holiday cheer drawing near…
And that is a clue…
To do a review…
So that we’ll become better forex traders next year…

So without further ado…
I’ll start with a Loonie review…
But don’t expect any more rhyming from here…

Well, that was fun. As you have probably learned from our School’s lesson on How Oil Affects USD/CAD, Canada’s economy is heavily dependent on oil exports, which is why the Loonie has a positive correlation with oil and USD/CAD has a negative correlation with oil. Forex veterans may want to skip to the next paragraph, but for the forex newbies out there who are zoning out right about now, a positive correlation between oil and the Loonie simply means that if oil goes up, then the Loonie tends to go up also, while a negative correlation is the opposite – if oil goes up, then USD/CAD goes down. You can read more about correlation in our School’s lesson on Currency Correlation Explained.

CAD & Oil Daily Forex Chart

CAD & Oil Daily Chart

As y’all can see, I have that there daily chart above, and allow me explain it a bit. That’s an overlay of USD/CAD, EUR/CAD, GBP/CAD, and oil to show that Loonie pairs more or less track the movement of oil prices. And I chose three pairs to help filter out forex price action due to catalysts for the opposing currencies.

Oil is the black-colored candlesticks because oil is also known as black gold or black crack. USD/CAD is colored green because of, well, the Greenback while GBP/CAD is colored red because of, uh, the British Redcoats and the Queen’s Guards that unruly tourists just love to make fun of. As for EUR/USD, it’s colored goldish orange because I’m going for a Christmas-themed color scheme of red, green, and gold.

I’ve also marked turning points and periods of interest, and I’ll be discussing briefly what drove the Loonie’s forex price action below.

Period A: Surprise BOC Rate Cut

This period was marked by BOC officials smacking forex traders and market analysts with a surprise rate cut from 1.00% to 0.75% on January 21 as a so-called preemptive response to the drastic fall in oil prices back in 2014.

Another major event during this period was the oil slump bottoming out, likely due to reports that U.S. oil companies were scaling back on both current (relative to that time) production and investment, which naturally eased oversupply concerns. And as I noted in an earlier-write-up for a speech given by BOC Governor Stephen Poloz, the ramping up of U.S. oil production was one of the primary factors driving down global prices from the supply side of the equation. Forex traders were clearly more focused on the preemptive rate cut, however, since the Loonie continued to retreat from most of its forex rivals despite oil prices bottoming out. The Loonie did recover a bit later on, however.

Period B: Oversupply Concerns

Period B marks the period where the oil rally started slowing down before grinding slowly southwards. The rally probably ended due to to renewed oversupply concerns amid speculation that OPEC would not be cutting back on production at the time and promises (or threats) from U.S. oil producers that they would be pumping up production again, not to mention a stronger U.S. dollar due to expectations of a positive NFP report for the April period (well, it was kinda good). And as you can see USD/CAD started rising several days before oil started weakening again. Not even a somewhat upbeat BOC statement was able to stem the Loonie’s weakness.

Period C: Lots of Oil Supply Shocks and a Rate Cut

Period C is the period wherein the oil slump started to accelerate, with the main trigger arguably being the “No!” vote in Greece after failing to meet an IMF deadline. There were other event risks, too, such as the freefall in Chinese equities and the Iran Nuclear Deal. And with all of those potential oil supply shocks lined up, the BOC promptly cut rates yet again during their July 15 rate decision statement, sending forex traders on another Loonie selling frenzy despite more or less positive Canadian economic indicators at the time, aside from negative GDP growth.

Period D: Oil Slump Stops

This is the period wherein the oil slump was halted. I made a nice little write-up summarizing the main drivers, which you can read here, but the main driver was most likely OPEC members finally expressing that they were willing to cooperate in lowering oil output after stubbornly refusing to do so. This is also the period wherein it became clear that the Canadian economy was finally in a technical recession, but forex traders probably priced that in already since there was no Loonie selling frenzy. In fact, the Loonie’s forex price action mostly mirrored that of oil.

Period E: BOC Less Likely to Cut or Hike

We’re almost there! Period E highlights the period where oil prices started going back down again after trading mostly sideways with some hints of strength. The decline was mainly due to reports that OPEC members were still shipping oil as fast as they could get them out of the ground in a war for market share and a stronger U.S. dollar due to rampant speculation (and probably mass hysteria) on a December rate hike. And while BOC officials were mostly dovish during their Oct. 21 meeting that they even downgraded their GDP forecasts for the next two years, they also hinted that they were unlikely to hike or cut rates until 2017, which is probably why the Loonie was trading mostly sideways (and even won out against some of its forex rivals) while oil prices trended lower.

Period F: December Commodities Carnage

The final period is what Pip Diddy keeps dramatically referring to as the December Commodities Carnage, with oil leading the way due to another bout of oversupply worries due to the decision of OPEC members to not rein in oil production despite a clear glut in the oil market and oil prices currently at multi-year lows.

So, where will the Loonie go from here? Don’t be shy to share your predictions for the Lonnie’s forex price action in the poll or comments section below!