United States Crude Oil Inventories-‘Economy 101’:
Canada exports more than 3 million barrels of oil or 75% of crude oil (aka black gold) to U.S.A. Crude oil price or volume change has a significant impact on the ‘flow of USD’ into the Canadian economy, and therefore on the loonie.
The oil prices have direct effect on the value of the loonie versus the U.S. dollar.
Oil has a negative 90% correlation with USDCAD ( back tests from 2000 to 2016). If U.S. economy slows down, that means ‘demand for goods goes down’, manufacturing activity slows down. This translates to “Demand for oil has potential to fall“, which could hurt demand for the CAD. On the flip side, when U.S. demand rises, manufacturing activities demand(need) more oil, that lead to a rise in oil prices. High oil prices mean fall in USDCAD.
This report (published by the Energy Information Administration) on Wednesday at 14:30 GMT, has 3 Scenarios for USD :
- If within expectation of 0.2M to 0.8M, USDCAD can go up in small range.
- Above expectations number of 0.9M to 1.4M is considered bullish signal.
- Below expectations of -0.4M to 0.1M is weaker signal with a potential to create bearish sentiment.
- Prof. Werner Antweiler, Ph.D.
- Martin Charron: A Medium-Term Forecasting Equation for the Canada-U.S. Real Exchange Rate, Government of Canada, Department of Finance, 2001-08.
- Ramzi Issa, Robert Lafrance, and John Murray: The Turning Black Tide: Energy Prices and the Canadian Dollar, Bank of Canada Working Paper 2006-29, August 2006.
- Domenico Ferraro, Ken Rogoff, and Barbara Rossi: Can Oil Prices Forecast Exchange Rates?, NBER Working Paper No. 17998, April 2012.
- Geoffrey Morgan: The petrodollar effect: Just how much is the loone tied to oil prices?, Financial Post, November 27, 2014