Fergal Smith

TORONTO (Reuters), – The Russia-Ukraine crises is at its peak in fourteen years. As a result, the historic connection between the Canadian Dollar and energy prices has weakened. It leaves Canada’s Bank of Canada less equipped to combat inflation.

With the normal close relationship between oil and Canadian dollars, the central banks could depend on a stronger currency in order to alleviate inflation pressures triggered by high energy prices. The gains would lower the price of Canada’s imported goods.

However, this is not the case in the current cycle. The crisis has also damaged the outlook for global economic growth, which can be a problem for currency-sensitive currencies such as the loonie and driven demand for safe haven U.S. dollars.

Eric Theoret (global macro strategist, Manulife Investment Management), stated that “there is a kink” in the relationship CAD-oil. You aren’t getting the currency strength necessary to dampen inflation.

Last time oil went above $100/barrel, 2014 saw the Canadian dollar at 1.09 USD. That’s almost 92 US cents. It currently stands at 1.28.

Graphic: Canadian dollar decouples from oil: https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwaarwvo/Canadian%20dollar%20decouples%20from%20oil.png

According to Refinitiv Eikon data the 3 month rolling correlation between oil and the Canadian dollar has dropped to 0.3, down from 0.9 in December. This is closer to zero, which would mean that there’s no connection.

Shaun Osborne is chief currency strategist for Scotiabank. “What we have observed over the past month or two has certainly been a quite significant exception in what had historically been a very stable and fairly consistent relationship.”

We would likely be in a position where the Bank of Canada would not resist the idea of a stronger Canadian currency.

Canada’s central banking has promised to curb inflation. It reached 5.1% in January for the first time since 1981, making it its highest point in 30 years. It raised the key interest rate last Wednesday for the first-time in three years, and indicated that more increases are possible.

Economists predict that inflation could rise even more in the months ahead due to rising commodity prices.

According to Reuters, higher energy prices will eventually benefit the loonie in the next year. However, this is due to a better in Canada’s terms, which refers to the ratio of Canada’s export prices to its import prices. Rather than an anticipated increase in investment.

Canadian businesses are cautious about investing aggressively in oil production, especially after 2020’s devastating pandemic-driven oil price drop. Investments demand capital discipline. Environmental opposition to fossil fuel projects, and Canada’s plan to limit carbon emissions will also discourage growth.

Adam Button (chief currency analyst at ForexLive), said that the era of “drill and baby drill” is gone in America. He was referring to the slogan used by the U.S. Republican Party.

Button declared that “Oil hasn’t been the driver of the Canadian dollars” once it was.