UBS have an extensive note on oil and the Canadian dollar.
In very brief:
- CAD’s relationship with oil has weakened somewhat recently. We believe the main drivers are a) the lower share of the oil industry in the overall economy which impacted the BoC’s reaction function to recent oil price movements; b) the supply-type nature of recent oil shocks; and c) the changing sensitivity of the broad US dollar to oil due to the rise in US oil production.
- since Canada is likely to remain a significant oil producer and exporter, positive CAD-oil correlation is not going away
UBS view on CAD for the year:
- USD/CAD … estimated fair value … 1.3370
- CAD underperformance this year, which in our view will be driven by subpar Canadian growth and the likelihood of a BoC rate cut which remains under-priced (only 25% chance by April)
- In the near term, CAD/JPY downside may offer some protection against fragile market sentiment and global growth concerns.
- Once the global economy returns to positive growth, we continue to target a 4-5% rise in AUD/CAD from current levels as CAD lags the recovery in other commodity currencies