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The Loonie was tracking oil, for the most part, this year.

And oil benchmarks are ending the year on a high note.

USD/CAD & Oil: Daily Chart
USD/CAD & Oil: Daily Chart
  • U.S. WTI crude oil is up by 43.70% to $53.23 per barrel for the year (as of Dec. 23, 2016)
  • U.S. WTI crude oil is up by to 47.74% $55.08 per barrel for the year (as of Dec. 23, 2016)

As such, Loonie also had a great year.

The Loonie's Performance as of December 23, 2016
The Loonie’s Performance as of December 23, 2016

However, both oil and the Loonie didn’t just steamroll their way to a profitable year.

And as you can see on the chart below, the Loonie first staged the Winter-Spring Offensive of 2016, before being beaten back and forced to go on The Long Retreat, and then finally staging the Year-End Offensive of 2016.

USD/CAD: Daily Chart
USD/CAD: Daily Chart

Let’s discuss what the major events were during those three distinct phases, shall we?

The Winter-Spring Offensive

Oil’s Winter-Spring Offensive hit a snag right at the start, thanks to the slump in oil prices on worries that oil demand for China would weaken, given China’s poor PMI numbers and the Chinese equities meltdown at the time, which I mentioned in my Monthly Review of 2016’s Trading Themes.

Another major concern at the time was that the sanctions on Iran would be lifted, which would result in even more supply.

Thankfully, a cold front began to sweep across the U.S. and Europe, which prompted some profit-taking by the shorts while spurring speculation that oil demand would pick up.

Bullish momentum then continued to swing in favor of oil and Loonie bulls, thanks to OPEC’s call for reducing oil output to members and non-members alike.

Later, during the month of February, OPEC’s call for a reduction in oil supply evolved into a tentative deal between OPEC members and Russia for an oil freeze deal. Quite naturally, this fueled even more demand for oil and the Loonie.

March was also a good month for oil and the Loonie, largely because speculation on the oil freeze deal kept the two supported, especially after it was announced that oil producers will have a little pow-wow in Doha come April.

Unfortunately, the April Doha oil freeze deal turned out to be a dud. But on a more upbeat note (for oil and the Loonie bulls at least), oil quickly recovered after the Doha debacle, thanks to several oil-related news, particularly the Kuwaiti oil workers’ strike that slashed Kuwait’s oil output by 50% (more than 60%, according to some market analysts).

The Long Retreat

In May, the Winter-Spring Offensive finally came to an end and the Long Retreat began. Although it has to be said that the Loonie was doing most of the retreating, not so much for oil, well, not yet anyway. And as you can see in the chart below, there was even a little divergence going on in May, with the Loonie retreating while oil continued to advance. What’s up with that?

USD/CAD & Oil: Daily Chart
USD/CAD & Oil: Daily Chart

Well, a massive wildfire started raging in Canada’s oil-rich province of Alberta on the 1st of May. And many Canadian oil companies either drastically scaled-down or completely shut down their operations within days, which means lower supply, thereby boosting oil prices. However, the lower oil output and the immense destruction being inflicted by the wildfire are bad for the Canadian economy, which is why the Loonie tanked instead.

Oil finally started retreating in June, thanks to turmoil over the Brexit referendum and reports that U.S. shale drillers were starting to increase the number of oil rigs to take advantage of the rise in oil prices after the Winter-Spring Offensive. And the number of U.S. oil rigs only kept on increasing in July, so both oil and the Loonie continued retreating.

Both oil and the Loonie finally found some relief come August, thanks to OPEC’s announcement that it plans to hold informal talks on how to stabilize the oil market in September, as well as a report from the International Energy Agency saying that the oil market will start to tighten in the second half of 2016.

However, U.S. oil rigs continued to increase and confidence in an oil deal wavered, thanks to Iran playing hardball, which is why oil and the Loonie were net losers in September. However, OPEC’s informal meeting turned out to be a success.

Even better, OPEC announced a planned production cut (the first such deal since 2008), which OPEC said will be finalized by the time OPEC members formally meet in late November. And thanks to this announcement, oil and the Loonie gained strength during the first half of October.

Unfortunately, faith that OPEC will be able to finalize its planned oil cut deal in November began to fade, thanks to pessimistic reports, such as Iraq trying to get an exemption from the deal. As a result, oil and the Loonie both weakened during the latter half of October. Not to worry, though, because the Year-End Offensive was about to begin.

The Year-End Offensive

Like the earlier Winter-Spring Offensive, the Year-End Offensive had a rocky start, thanks to continuing doubts over OPEC’s oil cut deal, especially after OPEC reported that its oil output in October was at a record high of 33.64 million barrels per day.

Interestingly enough, the Loonie was a major beneficiary of Trump’s victory in the race to the White House, since Trump’s victory allowed the Loonie to win out against most of its forex rivals, with the exception of the pound and the Greenback.

This was likely due to easing uncertainty, especially after Canadian PM Justin Trudeau quickly congratulated Trump and promised a positive relationship between the U.S. and Canada. Genuine hope may also have been a factor because, as some market analysts point out, Trump has expressed support for the Keystone pipeline in the past, although Trump does want to renegotiate so that the U.S. gets a better deal.

After that, the market turned its attention back to the OPEC oil cut deal, and both oil and the Loonie were in high demand, thanks to heavy speculation that the oil cut deal would be finalized and pushed through.

And push through it did, which then further fueled demand for both oil and the Loonie. And speculation on and later confirmation that non-OPEC members would also be joining the oil cut deal kept oil benchmarks supported.