Published: April 16th, 2020
USD/CAD moved not very favourable for the loonie this week thanks to slumping oil prices caused by ongoing concerns about OPEC’s apparent inability to agree production cuts sufficient to offset plunging demand caused by the coronavirus pandemic.
While reports suggested OPEC and allies might reach agreement on cuts of up to 15 million barrels per day, analysts warned that deeper cuts would be required to balance loss of demand averaging closer to 19 million barrels per day.
The Canadian dollar’s downward slide might have been slowed by the US Federal Reserve’s unveiling of $2.3 trillion in new lending measures designed to cushion the economic impact of COVID-19 lockdowns on commercial activity – a move broadly seen as weakening the dollar.
But the Fed’s move was overshadowed by news of Canada's spiking unemployment rate, which rose from a historic low of 5.5 per cent in February to 7.7 per cent in March, with bank economists warning the country’s labour market could experience more pain.
Forecasts from Toronto-based RBC point to a coming unemployment rate averaging 14 per cent or more in Q2, almost doubling March’s rate.
Commodity currencies like the loonie have all slipped against safe-haven rivals like the yen and greenback this week.
In a sign that investors remain worried about sinking oil demand and the consumption outlook for commodities generally, the dollar pushed higher against its New Zealand and Australian counterparts, which are usually seen as barometers for commodities market risk.
Forex markets remain on edge over the ongoing pandemic as restrictions on business and personal movement look set to push the global economy into deep recession.
Reaction to recent OPEC announcements suggests that markets believe the decline in oil demand is well ahead of the output cuts currently on the table.
Analysts at Daiwa Securities in Tokyo said the OPEC cuts of 15 million are seen as insufficient, and that will be negative for oil producers, encouraging risk-off currency trading that will support the yen.
The dollar rose 0.63% against the Norwegian crown to 10.25 and 0.51% to 23.45 Mexican pesos.
The greenback held steady against the loonie earlier this week at C$1.3956. The Australian dollar pulled back from a four-week, dropping 0.17 per cent, while the New Zealand dollar fell 0.20 per cent.
Trading has been somewhat subdued this week as financial markets in Australia, Hong Kong, the UK, and New Zealand stayed closed for the Easter Monday holiday.
OPEC announced agreement output cuts on Sunday in a move designed to prop up oil markets amid severely diminished global demand.
But oil prices were already in freefall thanks to worries about COVID-19 and the ongoing price war between Russia and Saudi Arabia, which many had seen as a long-term strategic play to weaken the US shale industry.
Currencies from major oil producers including Canada, Norway, and Mexico got a fillip last week as rumours began to circulate that an agreement on output cuts was close. Any gains evaporated on Monday however as investors shifted away from risk assets.
While higher oil futures trading in Asia compensated for early losses, forex trades highlighted investor concern about prevailing market uncertainty – risk-off sentiment that was backed-up by declining US stock futures.
The mood of caution served to push the yen upward, thanks to its reputation as a stolid safe-haven during times of economic turmoil. Investors believe Japan's current account surplus puts it in a strong position to whether market turbulence.
Yen rose 0.32 per cent against the dollar at the start of the week, while AUDJPY jumped more than 0.4 percent.
In the world's second-largest economy, the yuan was on 7.0423 per dollar in early trading this week. COVID-19 first emerged in China’s Wuhan province in November last year and has hammered the country’s economy.
Export data scheduled for release this week is expected to clarify the extent of the pandemic's negative impact on the global economy.
The greenback also held steady against the safe-haven Swiss franc, sustaining a per franc value of 0.9661.
Against the euro, dollar traded lower at $1.0926. Numbers from Reuters show that speculative net short positions in the US currency have risen to their highest since May 2018, which could also ease further dollar declines.
Sterling held steady at $1.2469 against the dollar, and 87.67 pence per euro, on news that Prime Minister Boris Johnson had been discharged from hospital after treatment for COVID-19.
While this week saw commodities currencies in decline, they were buoyant last week on suggestions that the coronavirus pandemic might be peaking – alongside hints of a breakthrough in OPEC’s ongoing output cuts negotiation with members.
The Canadian dollar traded at C$ 1.4021 against the greenback last week, continuing a slow recovery from a four-year low of C$ 1.4668 on 20th March.
The Norwegian Krone also strengthened, moving up to 11.1204 per euro and putting it close to its highest level since mid-March.
Media coverage of comments by Algeria's energy minister saying he expected a positive outcome, and reports suggesting Russia would cut its output, all served to keep commodities currencies stable or rising at close on Friday.
For the year-to-date, global crude oil prices have declined by more 65 per cent. The level of price decline has hammered revenues from Canada’s number one export. While that continues, the country's terms of trade will see significant deterioration.
With crude markets facing a glut of capacity even as supply continues to increase, demand is expected to be weak for the foreseeable future and may further embed the ‘lower-for-longer’ oil market reality that has dominated since the rise of US shale.
In that scenario, forex analysts expect the loonie will under-perform, while other oil-dependent currencies like the Norwegian krona and many developing world currencies will also be under sustained pressure.
