16 Jun 2014
A weak correlation in CAD/Crude - TD Securities
FXStreet (Guatemala) - Shaun Osbourne, Chief FX Strategist at TD Securities noted the response in the crude prices in relation to CAD.
Key Quotes:
"Firmer crude prices in response to developments in Iraq are a notable feature of markets in the past few sessions but the CAD is not really catching a bid on the back of higher oil prices or the broader recovery in commodity prices. Our correlation matrix above highlights the fact that while the CAD’s correlations with crude oil and the CRB have strengthened, the overall relationship remains rather weak at the moment."
"We have noted previously that the CAD tends to get less of a boost from extremely high oil prices historically (the CAD’s correlation with crude prices broadly tends to weaken north of $100/bbl—see chart, over) which may reflect concerns that, ultimately, very high energy prices are counter-productive for global growth and are therefore a net negative for commodities and commodity currencies."
"Another issue for the CAD currently is the fact that Canada’s benchmark oil (Western Canada Select—WCS) is less affected by geo-political tensions than Brent or WTI to a degree—due to geography/supply/blend considerations. In fact, despite the flare up of tensions in Iraq last week, the WCS discount to WTI widened to USD20, the biggest price gap in a month. The CAD may struggle to gain any significant support from higher oil prices and Iraq tensions specifically."
"We still rather think that the CAD looks a little rich at current levels—US-Canada spreads in the belly of the curve remain in USD-supportive territory and a positive message from the Fed this week may encourage yields to firm up a little more. USD/CAD should remain supported in the low 1.08 area for now. Our FV estimate for USD/CAD (1.1175) remains around two standard deviations above the current spot rate."
"There may be better opportunities to short the CAD—versus the JPY amid declining expectations of the need for further BoJ stimulus and safe-haven demand, CAD/JPY remains blocked below 94.00/10, where the market has been capped for the past month. GBP/CAD remains a candidate to improve in the medium-term amid positive BoE rate comments and a still neutral BoC. We look for GBP/CAD to improve more materially above 1.85 near-term and retest the recent peaks near 1.8650."
Key Quotes:
"Firmer crude prices in response to developments in Iraq are a notable feature of markets in the past few sessions but the CAD is not really catching a bid on the back of higher oil prices or the broader recovery in commodity prices. Our correlation matrix above highlights the fact that while the CAD’s correlations with crude oil and the CRB have strengthened, the overall relationship remains rather weak at the moment."
"We have noted previously that the CAD tends to get less of a boost from extremely high oil prices historically (the CAD’s correlation with crude prices broadly tends to weaken north of $100/bbl—see chart, over) which may reflect concerns that, ultimately, very high energy prices are counter-productive for global growth and are therefore a net negative for commodities and commodity currencies."
"Another issue for the CAD currently is the fact that Canada’s benchmark oil (Western Canada Select—WCS) is less affected by geo-political tensions than Brent or WTI to a degree—due to geography/supply/blend considerations. In fact, despite the flare up of tensions in Iraq last week, the WCS discount to WTI widened to USD20, the biggest price gap in a month. The CAD may struggle to gain any significant support from higher oil prices and Iraq tensions specifically."
"We still rather think that the CAD looks a little rich at current levels—US-Canada spreads in the belly of the curve remain in USD-supportive territory and a positive message from the Fed this week may encourage yields to firm up a little more. USD/CAD should remain supported in the low 1.08 area for now. Our FV estimate for USD/CAD (1.1175) remains around two standard deviations above the current spot rate."
"There may be better opportunities to short the CAD—versus the JPY amid declining expectations of the need for further BoJ stimulus and safe-haven demand, CAD/JPY remains blocked below 94.00/10, where the market has been capped for the past month. GBP/CAD remains a candidate to improve in the medium-term amid positive BoE rate comments and a still neutral BoC. We look for GBP/CAD to improve more materially above 1.85 near-term and retest the recent peaks near 1.8650."