The Canadian dollar is taking a hit against the U.S. dollar, after positing its biggest decline since March. The Canadian dollar, which is trading at $1.33 compared to the U.S. greenback is down 0.8% over the last few trading days and has lost 3.7% of its value over the last year.
The Canadian dollar is facing headwinds due to lower oil prices and economic data out of the U.S. which shows the world’s biggest economy is slowing down and expected to tip into a recession.
Oil is trading at around $71.00 per barrel, down from March 2022 highs of $130 per barrel. Despite supply cuts from OPEC+, the Chinese economy reopening, and increased demand from India, the U.S. Energy Information Administration (EIA), expects oil prices to hover around $73.62 per barrel in 2023 and $74.00 per barrel in 2024, far below the average $85 per barrel.
Why Is the Canadian Dollar Down?
At 9.5%, the energy sector is responsible for a big part of Canada’s gross domestic product (GDP). Oil and gas, which includes upstream and midstream operations, and natural gas distribution, accounts for 7.5% of national GDP.
There is a high correlation between the Canadian and U.S. dollars and price of oil. When the price of oil rises, the Canadian dollar usually rises in step to the U.S. dollar. And when Canada sells oil to the U.S., it gets paid in U.S. dollars.
Canada is home to the third largest oil reserves in the world, with 171 billion barrels of crude—a 10th of the world’s oil supply. The vast majority of it (166.3 billion barrels) is located in Alberta.
In 2021, the EIA said that Canada supplied 62% of all U.S. crude oil imports, nearly twice as much as Mexico, Russia, Saudi Arabia, and Colombia combined. The Canadian dollar is also facing headwinds from weakening U.S. economic data.
The number of people applying for unemployment benefits climbed to the highest level since October 2021, suggesting the U.S. economy is slowing. Meanwhile, producer prices, which is a measure of what businesses pay for goods and services, rose modestly in April. The 2.3% year-over-year increase is the lowest reading since the start of 2021.
On the one hand, this points to the Federal Reserve pausing future interest rate hikes. But the data is also consistent with most economists’ predictions of a U.S. recession by the end of the year.
This could be bad for both the Canadian dollar and broader economy. In addition to Canada being responsible for 62% of all crude imports, Canada sends around 75% of its total exports to the U.S.
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The Canadian loonie is facing headwinds from weaker oil prices and softening economic conditions in the U.S. Both factors could change the country’s financial picture and corporate earnings.
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