Correlation between oil prices and Canadian dollar breaks as Canada loses hedge against economic downturn

The historical correlation between the Canadian dollar and oil prices is no more.

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As an oil-exporting country and the owner of the world’s third-largest oil reserves, Canada has benefited from a correlation between its currency, the Canadian dollar, and oil prices for years.

Historically, since Canada was a large producer and exporter of oil, increases in oil prices would strengthen the Canadian dollar, easing inflation and boosting the purchasing powers of Canadians internationally.

Observers speculated that the Trudeau government’s anti-energy agenda has likely broken that correlation as investors are not confident that Canada will remain a prominent oil producer in the future.

Others pointed out that the phenomenon could be due to the recent increase in the U.S. dollar.

In blue, the Canadian dollar can be seen holding a relatively tight correlation with crude oil prices from 2014 to 2020. However, as oil prices have increased since 2020, the Canadian dollar has been on a steady decline.

In 2014, when oil was above $100 per barrel, the Canadian dollar was trading at $0.92 U.S. Today, with crude oil (WTI) trading at $109.44 per barrel, the Canadian dollar is trading at $0.78 U.S.

Despite the historically high energy prices and the international turmoil, Trudeau’s Liberal government remains committed to an energy transition.

Despite holding the world’s third-largest reserves, Canada has the highest average cost of gas per litre when compared with all 10 other largest oil reserves countries.

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