Oil pump jack, Calgary, Alberta, Canada. Image © Adobe Stock.
Oil prices are forecast to decline further, ensuring CAD stays under pressure.
Having reached new multi-year lows against the Euro and Pound on Thursday, the Canadian Dollar looks set to remain pressured as oil prices extend lower over the coming weeks.
"Oil's going down," says Jeremy Boulton, an analyst at Reuters. "OPEC+ agreed on a further oil output boost from October."
Boulton says weaker oil will weigh on the U.S. Dollar, as oil and gas trade is realised in U.S. dollars, but oil producers who derive foreign currency earnings from exports of crude will also likely see their terms of trade suffer, like Canada.
The call from Boulton and other analysts comes as the GBP/CAD rises to its highest level since 2016 at 1.8762, while EUR/CAD rises to its highest since 2009 at 1.6228.
Brent crude prices are trading consistently below the $70/bbl base of the prior long-term range and the August/September lows near $65/bbl are close to a very important level.
"A close below $63.02 - 61.8% 2020-22 surge would be extremely bearish," says Boulton.
Further declines in the price of oil will have implications for the Canadian Dollar over the medium term because it is the most oil-sensitive currency in the G10 bloc of the world's biggest freely traded currencies.
This is because Canadian oil exports drive a significant portion of the country's foreign exchange earnings. Canada's extractive industries (mining, quarrying, and oil and gas) accounted for 5.1% of Canada's total GDP of roughly $2.3 trillion in 2024. Oil and gas is the largest sector of the three, contributing $74 billion, or 3.3% of GDP.
The below chart shows the CAD vs. GBP exchange rate's chart at weekly intervals in the top panel and brent crude in the lower panel, showing a long-term correlation:
The chart reveals the steady erosion in the value of oil since 2022 has corresponded with the downtrend in the CAD's value against the GBP. This relationship is evident in other major CAD exchange rates.
Economists at Standard Chartered say to expect oversupply in the oil market as OPEC+ gradually rolls back its 2022 cuts, bringing back about 2.2 million barrels per day in the April-September period.
"Seasonal demand remains supportive but not enough to shift the broader surplus narrative. Near-term geopolitical risks, including disruptions to Russian supply through sanctions, remains a near-term upside risk, but we keep our three-month WTI forecast unchanged at USD 65/bbl," says Standard Chartered.
Economists at Morgan Stanley meanwhile think oil can go lower, to $60/bbl:
"After summer strength wanes, the global surplus is likely to re-emerge. Eventually, we suspect this will roll over into critical price-driving storages in the Atlantic basin as well. To allow oil inventories to build, the forward curve will need create favourable storage economics. That requires a contango structure, driving flat price down to ~$60/bbl for a period, we estimate."
The Canadian dollar is already under pressure from a weak domestic economy, characterised by rising unemployment, and oil's steady loss of value will only add to the currency's soft underbelly.