CAD gains as crude oil prices soar from disruptions in Libya, Israel
USD/CAD has dropped below 1.3500 for the first time since March, and crude oil futures surged over 3% to start the week. Is this a coincidence or the resurgence of the historical CAD-oil correlation?
Key points
- USD/CAD fell below 1.3500 for the first time since March, showing a 2.4% decline month-to-date
- August highs for USD/CAD are above 1.3900
- Crude oil futures surged over 3%, rising above $77 per barrel due to various geopolitical tensions
- CAD's correlation with crude oil prices is being questioned, with recent correlations deteriorating
- USD/CAD has traded within a range of 1.31 to 1.39 for the past two years, but reached as low as 1.200 in 2021
USD/CAD falls below 1.3500 for the first time since March
USD/CAD has fallen below 1.3500 for the first time since March, showing a 2.4% decline month-to-date. The pair has traded as high as 1.3900 earlier this month but continues to fall, now hovering around 1.3475. This drop can be attributed to positive economic data from Canada and anticipated US rate cuts.
Crude Oil Surges 3% on Libya Shutdown and Israel Airstrikes
Crude oil futures are up over 3%, trading above $77 per barrel after a busy weekend involving reported production halts in Libya due to disputes between internal governments. Middle East tensions also continued to rise over the weekend as Israel traded strikes with Hezbollah near Lebanon. These geopolitical events have significantly impacted crude oil prices, some directly changing the supply dynamics and others highlighting the sensitive interplay between global politics and commodity markets.
Is the Canadian Dollar Re-Coupling with Crude Oil?
Historically, the Canadian dollar (CAD) has been positively correlated with crude oil due to Canada's dependence on oil exports and its impact on GDP. Recently, the two have moved more independently, with a 2-month correlation between USD/CAD and /CL of -0.09, compared to a longer term 3-year correlation of -0.31. This recent move raises questions about whether the relationship is strengthening again, or if it's merely a coincidence. Traders are closely watching for signs of re-coupling, which could influence trading strategies involving CAD and crude oil.
Potential for Continued Strength in the Canadian Dollar
Over the past two years, USD/CAD has been trading in a range of 1.3100 to 1.3900. However, before this period, the pair dropped as low as 1.200 in 2021 and remained under 1.30 for most of 2022. The current trend suggests a historical precedent for further strengthening of the Canadian dollar, especially if positive economic indicators continue to support its value. Traders will monitor the Canadian dollar closely this week ahead of key Q2 GDP figures set to release on Friday.
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