The Canadian dollar’s driving force is malfunctioning

The Canadian dollar, once closely tied to the price of oil, is now breaking free from its ‘petro-currency’ status, according to a new analysis. Charles St-Arnaud, chief economist at credit union Alberta Central, highlighted the shift in a recent note, noting that despite higher oil prices over the past year, the loonie has failed to appreciate as it once did.

St-Arnaud pointed to a clear break in the relationship between the Canadian dollar and oil prices starting in 2016, which has become more pronounced in recent times. This divergence is attributed to changes in how oil majors in Canada are utilizing their revenue.

One significant factor identified by St-Arnaud is the increase in cash payouts to investors, with a substantial portion going to non-Canadian shareholders. This trend, along with a decrease in reinvestment by Canadian energy companies, has led to a reduced demand for the Canadian dollar, putting downward pressure on the currency.

The economist estimated that the decline in reinvestment means that companies are converting less of their U.S. dollar holdings into Canadian currency, further contributing to the loonie’s depreciation. This shift in the relationship between oil prices and the Canadian dollar could have implications for inflation and monetary policy set by the Bank of Canada.

Overall, the analysis suggests that the Canadian dollar’s link to oil prices is weakening, signaling a new era for the currency’s valuation in the global market.