Oil prices to be a ‘neutral driver’ of the loonie in 2013: Scotiabank

Canada’s dollar has increasingly been viewed as a petrol currency over the last few years, but an analyst at Scotiabank expects oil will be a “neutral driver” of the loonie next year.

The loonie has been slapped with the petrol term because it tends to do well in periods when the price of oil is strong, which in turn boosts the Canadian economy. But Camilla Sutton, chief currency strategist at Scotiabank, sees strong oil prices both hurting and benefiting the loonie in 2013.

“Traditionally, CAD has been viewed as a petrol currency; however this is an increasingly complex relationship,” she said in a note to clients.

While she points out that higher oil prices are expected to “remain supportive of the Canadian economic backdrop,” she points out that a widening of the spread between Brent oil prices and WTI oil prices weighs against the Canadian economy. That’s because Canada exports oil at WTI oil prices, which tend to be lower than Brent, based on the fact that much of its oil shipped to refineries in the U.S. Midwest where WTI pricing dominates. Meanwhile, due to a lack of infrastructure to pump oil from western Canada, many provinces in central and eastern Canada import oil based on higher Brent prices.

Ms. Sutton also points to the fact that U.S. oil production has ramped up, and that analysts are increasingly talking about how much this will impact Canadian oil exports.

“Most experts suggest that Canadian exports to the U.S. will not be impacted; however as questions remain it dampens any positive oil impact on Canadian dollar,” Ms. Sutton said.

Regardless, Ms. Sutton sees the Canadian dollar remaining relative strong next year. Her current forecast calls for the U.S. dollar to fall to 96 cents against the loonie, down from its current level of about 99.26 cents based on pricing as of Thursday morning.
Source: Financial Post