Oh Canada as is the national anthem moniker. The first question one must ask regarding Canada is who are you, Australian, British or USD. Well CAD was pegged to GBP from 1841 – 1858 and its currency today and economic system loosely resembles the UK system so it shares a British tradition. CAD currency was once Spanish Holy Dollars, same as Australia and thanks to a fascinating British sailor by the name of Captain James Cook. Canada’s Total Return bonds are calculated exactly as Australia’s bonds. Due to geographic proximity to the US, Canada melded its economic system to the US because of export trade in oil, metals and Car parts. In WW 1, Canada pegged to USD at CAD 1.10 Vs USD 1.00. It free floated in 1950 then re-pegged again to USD at CAD 1.000 to USD 0.9250. Canada is a long time economic and foreign policy friend to the US, Its economic system is a hybrid and backed by protections upon protections. Its not a tough system to understand but it takes research to understand how it works, what triggers the system and what makes the exchange rate move. The economic system and exchange rate are found in channels, ranges yet small spaces.
Inflation is running at 1.3%, Core at 2.3% and not good. Canada Targets Inflation in ranges and calls it Inflation Control targets. Inflation Control Targets are agreed in 5 year increments. The last increment was agreed November 2011 and runs to December 2016. Because Canada’s Monetary Policy decisions run with a 6 – 8 quarter lag especially Inflation, CPIX was introduced to track headline inflation but added as a protection so the bottom doesn’t drop into deflation. CPIX is strictly Core as is the PCE Deflator in the US, Tradables vs Non Tradables in New Zealand and Australia. But Canada’s CPIX resembles Sweden’s CPIX. The only difference is Sweden strips out housing while Canada excludes Food, Gas and Indirect taxes. All the methodologies are the same its just the manner employed as the monitor nation to nation. On the BOC homepage is the Inflation Control Target and Operational Guide. The Operational Guide is Core Inflation or CPIX.
Canada is banking on lower Inflation as it sees GDP growth return in late 2016 due to a lower CAD exchange rate, higher USD and increased export growth. CAD to USD is currently 0.7536 VS USD to CAD 1.3269. A lower CAD, higher USD is a stimulant to Canada and exports. All nation’s believe as they lower exchange rates then exports will bring economies back to health. This path will lead to export wars later as was the situation in the 1930’s. Ever see France and Britain meet one on one in formal relations, nope. The lingering effects are still felt 75 years later as the best of the Export / Currency wars existed between France and the UK. Each sought to crush each other’s currency to gain export advantage.
Canada’s oil in found in Western Canada Select, WCS and Edmonton Mixed Sweet. WCS closed at CAD 36.70, up 4.97. WCS Vs 1 year ago was CAD 84.38, off 47.58 with an average Year to Date price of 48.79. The 36.70 close price is USD to CAD 46.75 at the close spot price and 48.70 with a 4% premium included as is the case for Canada. From CAD to USD close price 36.70 then 27.66 and 26.55. At the 2014 CAD 84.38 highs translates to USD 111.83 and CAD to USD at 63.52 and 60.98. The year to date change at minus 47.58 translates to USD to CAD 63.13 and 60.61. CAD to USD translates to 34.42 and 35.86. The average year to date price 48.79 at CAD to USD equates to 35.30 and 36.77 and USD to CAD 62.15 and 64.74.
Edmonton Mixed Sweet closed at CAD 49.57 and translates to USD to CAD at 63.14 Spot and 65.77 with 4% Cash Rate. CAD to USD translates to 35.86 Spot and 37.36.
The WTI / WCS Differential runs CAD 19.47 or CAD to USD 14.09 spot and 14.67 with the premium. The average year to date price at 59.44 equates to USD to CAD 24.80 Spot and 25.83 premium. The 2014 CAD 17.97 differential equates to USD to CAD 22.89 Spot and 23.84. CAD to USD 13.00 and 13.54. The average year to date price at 15.85 equates to CAD to USD 11.47 and 11.95. USD to CAD 20.19 and 21.03.
Canada in the latest July Monetary Policy report sees less investment in new production to constrains future supply, yet cost cutting and Technological advances lowers supply. A mention was offered OPEC may raise supply levels.
WTI Cushing Spot closed 42.56, + 3.96 and 1 year ago price was 93.88, off 51.32 with an average year to date price at 51.68. At 42.56 translates to CAD to USD 30.79 and 32.07, USD to CAD 54.21 and 56.47. The year ago price at 93.88 means USD to CAD 119.59 and 124.57, CAD to USD 67.92 and 70.75. The 51.68 average year to date price translates to CAD to USD 37.39 and 38.95. USD to CAD 65.83 and 68.57.
Brent / WTI Spreads currently run 3.37, off from February highs at 7.22. The current 3.37 price translates to USD to CAD 4.29 and 4.47. CAD to USD 2.44 and 2.54. CAD to EUR 2.18 and 2.27. EUR to CAD 4.80 and 5.00.
Brian Twomey, Inside the Currency Market, btwomey.com