Is the Canadian Dollar signalling an oil price bottom?
Is the Canadian Dollar signalling an oil price bottom? The Bank of Canada (BOC) raised rates for the first time in seven years this week, the second major central bank to do so after the Federal Reserve. The BOC indicated that its economy ‘is approaching full capacity’. As a result, the Canadian Dollar, the so-called Loonie, jumped to the highest level against the US Dollar in 13 months. A rising CAD could be signalling a bottom for oil prices.
Business investment in the energy sector in Canada is recovering from a ‘prolonged steep decline’, according to the BOC, and oil exports are expected to improve, particularly to the US. The BOC notes that ‘the past oil shock is largely complete’. Indeed, Canadian energy companies have once again begun to implement capital expenditure plans with a sense of ‘cautious optimism’. Such an economic environment suggests that producers have largely adjusted to the current lower price environment. Rising investment and optimism reflects a better outlook for demand and is a supportive price environment for oil.
the Loonie has had a very strong correlation with oil prices
Historically, the Loonie has had a very strong correlation with oil prices, but the direction of causation is unclear. However, since the end of 2016, this relationship has become more distinct, showing that moves in the CAD are leading the moves in oil prices, reflecting that the BOC is adjusting policy partly as a result of strengthening underlying demand conditions in the energy sector. Against a backdrop of rising global oil demand, we feel that such a relationship could be signalling that the latest jump in CAD be the precursor of an oil price rebound.
With the Canadian economy improving and the central bank reacting in a proactive manner with its monetary policy stance, the CAD could move higher in coming months. In turn, with oil prices nearing a natural floor – where demand (supported by lower prices) has the potential to offset continued elevated global production levels – higher prices could be the result of a more balanced oil market in the second half of 2017.
Is the Canadian Dollar signalling an oil price bottom?
Martin Arnold, Global FX & Commodity Strategist at ETF Securities
Martin Arnold joined ETF Securities as a research analyst in 2009 and was promoted to Global FX & Commodity Strategist in 2014. Martin has a wealth of experience in strategy and economics with his most recent role formulating an FX strategy at an independent research consultancy. Martin has a strong background in macroeconomics and financial analysis – gained both at the Reserve Bank of Australia and in the private commercial banking sector – and experience covering a range of asset classes including equities and bonds. Martin holds a Bachelor of Economics from the University of New South Wales (Australia), a Master of Commerce from the University of Wollongong (Australia) and attained a Graduate Diploma of Applied Finance and Investment from the Securities Institute of Australia.
Gold inflows rebound to the highest levels in 16 weeks, and the fourth consecutive week of inflows. Long Gold ETPs received US$65.4mn – the largest inflows across the commodity complex as the US Dollar rally has stalled somewhat and US inflation breached the 2% level for the first time since 2014. Inflation, and the US Federal Reserve’s ability to deal with it, is critical for the trajectory of gold in coming months, especially with the onset of the Trump-era fiscal spending policies. Prices could threaten the 3% level in coming months and if the Fed doesn’t raise rates to counter, falling real interest rates will lift gold. Nonetheless, the ‘devil is in the detail’ for President Trump’s pro-growth policy framework, and whether the impact is felt in 2017, or as we expect, more likely in 2018 could limit gold’s gains.
Emerging market bonds received largest inflows in eight weeks. Emerging government bond ETPs recorded inflows of US$22mn last week, as investors continued to look to EM space for better returns. Higher yielding EM bond ETPs have now posted the third consecutive week of inflows.
Profit taking in short JPY ETPs reaches the highest level since April 2016. Investors have reduced positions to the US Dollar against the Yen for the twelfth consecutive week, as the steep decline in the Yen appears to have lost momentum. Conflicting statements from incoming US Government policymakers have forced the dollar to trade a volatile range against the Yen over the past few weeks, with outflows from ETPs giving short exposure to the Yen against the Dollar totalling US$13.8mn last week.
Record inflows betting against commodity currencies, totalling US$7.4mn. Amid hawkish comments from Fed Chair Yellen and concern that President Trump’s policies could exacerbate a Chinese growth slowdown, investors have funded record positions in favour of the US Dollar and against a basket of commodity currencies (Australian Dollar, Norwegian Krone, Canadian Dollar and New Zealand Dollar.) Bolstering such a trade is that oil prices remain near the top of recent ranges and with increasing production in the US, downside risk remains elevated.
Agricultural commodities received the largest inflows in six weeks, totalling US$18.3mn. Of the inflows, diversified basket exposures accounted for 21%, wheat 22% and cocoa 49%. The trend toward diversified investing hasn’t been confined to agriculture alone: over the past month, the most significant inflows into the energy, industrial metal and livestock sectors have been via diversified basket ETPs. Bargain hunting appears to be the driver for cocoa, as it has been the worst performing agricultural commodity over the past year, and the only one to post a negative return over the past month.
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The CAD has decoupled from oil prices as economic prospects wane.
Bank of Canada (BoC) has indicated that further stimulus was considered at the latest monetary policy meeting.
Weaker oil prices should see short positions mount against the CAD and the USD/CAD climb higher.
Oil prices offer little support
Since OPEC took the surprise decision to limit production last month crude benchmarks have managed to settle in a new trading range in and around the psychologically important $50/bbl level. Typically, this move would have lent support to the Canadian Dollar (CAD) against its major currency counterparts (due to its status as a commodity currency) but on this occasion it has failed to do so (see Figure 1). Instead, the currency has suffered from a widening nominal yield differential with the US (see Figure 1) and meagre economic prospects. This has helped to keep the USD/CAD moving on a well-established upward path for some time and the trend appears well placed to continue. We see a high likelihood of upcoming oil price weakness and an increasingly dovish bias from the Bank of Canada (BoC) helping to push the pair higher in the next few months.
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Crude fragility and dovish inclinations
Earlier this week, comments from the Iraqi oil minister claiming that the embattled nation should be exempt from any OPEC production agreement highlighted the challenges the cartel faces in imposing any limits. Several of its members are facing significant financial and geopolitical pressures (Iraq, Venezuela, Saudi Arabia etc.) and so applying country level quotas is almost certain to face obstacles. Until now the market has perceived the deal optimistically but the difficult practicalities of implementing the agreement are likely to see oil prices retrace a portion of their recent gains. This will likely add to bearish sentiment against the CAD and may prompt a monetary reaction from the BoC.
Recent comments and actions from the BoC have been mixed. At the latest meeting the central bank held interest rates steady (as broadly expected) and described risks to the inflation outlook as “roughly balanced”, a positive shift from “tilted to the downside” in the previous meeting. However in a surprising turn, the BoC governor, Stephen Poloz, did mention that the governing council “actively discussed the possibility of adding more stimulus”. In addition, the BoC reduced both its inflation and growth forecasts for this year and the next. While these actions failed to inspire a market repricing of future interest cuts, it does show a return to a dovish bias which may grow if manufacturing, trade and inflation data continue to disappoint.
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Shorts could mount
Net speculative positioning towards the CAD fell into negative territory at the end of last month, but still remains moderate. The move resulted from a reduction in long positions rather than a build-up in shorts, which remain a fraction of January levels due to recent strength in oil prices (see Figure 2). Any weakness in oil could see shorts build up and send the USD/CAD to higher levels. The pair is on a strong upward path and is only likely to face resistance at the 1.356 level, which is near March highs and would represent a 50% retracement of its decline earlier in the year.
Investors wishing to express the investment views outlined above may consider using the following ETF Securities ETPs:
Currency ETPs
EUR Base
ETFS Long CAD Short EUR (ECAD)
ETFS Short CAD Long EUR (CADE)
GBP Base
ETFS Long CAD Short GBP (GBCA)
ETFS Short CAD Long GBP (CAGB)
USD Base
ETFS Long CAD Short USD (LCAD)
ETFS Short CAD Long USD (SCAD)
3x
ETFS 3x Long CAD Short EUR (ECA3)
ETFS 3x Short CAD Long EUR (CAE3)
5x
ETFS 5x Long CAD Short EUR (ECA5)
ETFS 5x Short CAD Long EUR (CAE5)
Currency Baskets
ETFS Bullish USD vs Commodity Currency Basket Securities (SCOM)
ETFS Bearish USD vs Commodity Currency Basket Securities (LCOM)
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This communication has been provided by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”). The products discussed in this document are issued by ETFS Foreign Exchange Limited (“FXL”). FXL is regulated by the Jersey Financial Services Commission.
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The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.
This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.
This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective, officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.
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• Oil prices continue to slide.
• European bourses generally traded higher although Greek stocks were heavily hit after the reopening of its market.
• Commodity currencies diverge.
Declining oil prices led the commodity sector lower, with a swelling glut in production weighing on price. We believe that the current low oil price environment will encourage high cost producers to cut back on production, paving the way for price gains in the future. An appreciating US dollar maintained pressure on the commodity complex more generally. With 215,000 jobs added to the US economy in July, the Federal Reserve is likely to remain on track for an interest rate hike later this year. Consensus expectations are for a September hike, although the futures market is looking further out in the year for the central bank to pull the trigger.
Commodities
Oil prices continue to slide. WTI and Brent crude oil benchmarks fell 8.0% and 7.1% respectively to the lowest levels since March and January. The global supply glut shows little sign of relenting. US oil rigs in operation have increased three weeks in a row. OPEC’s monthly report due tomorrow is likely to confirm that Saudi Arabia has continued to increase production beyond 10.5mn barrels per day, adding more oil to an oversupplied market in it pursuit for market share. As the summer driving season in the US starts to wind down and refineries undergo maintenance before the winter period, demand for crude is likely to hit a lull, weighing on price in the short-term. Current conditions are likely to drive the cuts in capex to high-cost non-US, non-OPEC production, helping to tighten supply in the future. Wood Mackenzie estimates US$200bn of capex cuts across the industry, primarily in deep-sea production.
Equities
European bourses generally traded higher although Greek stocks were heavily hit after the reopening of its market. The Greek Stock Exchange re-opened after a five-week hiatus, allowing investors to sell their holdings. Greek stocks fell an initial 23% on Monday, before trimming losses to just 16% by Friday. European manufacturing purchasing managers indices surprised to the upside, lifting investor sentiment about the pace of the economic recovery. The DAX, FTSE MIB and FTSE100 gained 2.7%, 1.8% and 1.3% respectively. MSCI China A-Shares ended the week 0.4% higher as the market responded to the equity market support offered by the government. An estimated US$144bn has been spent by the government on supporting the market and we believe a considerable amount of resources are available to the China Securities Finance Corp, the state-owned margin lending agency that is the main conduit for injecting rescue funds into the market.
Currencies
Commodity currencies diverge. The Australian dollar increased 1.0% against the US dollar after the Reserve Bank of Australian left rates on hold at 2%. Despite disappointing economic data amid weak resource prices, a buoyant property market is driving the RBA’s reluctance to cut rate too far, especially as the efficacy of further cuts is likely to decline as we reach the zero bound. Falling oil prices weighed on oil exporting countries, with the Norwegian Krone and the Canadian dollar dropping 1.4% and 1.0% respectively against the US dollar. We expect the CAD and NOK to outperform AUD and NZD in months ahead as the oil price begins to recover. The US dollar rallied against most currencies, with the latest labour market data giving fuel for the Federal Reserve to hit the trigger on rate increases later this year. The Bank of Japan remained dovish at its latest policy meeting, helping the Yen depreciate.
For more information contact:
ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com
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This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (”FCA”).
Investments may go up or down in value and you may lose some or all of the amount invested. Past performance is not necessarily a guide to future performance. You should consult an independent investment adviser prior to making any investment in order to determine its suitability to your circumstances.
The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.
This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective, officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.
ETFS UK is required by the FSA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.
This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.
Other than as set out above, investors may contact ETFS UK at +44 (0)20 7448 4330 or at retail@etfsecurities.com to obtain copies of prospectuses and related regulatory documentation, including annual reports. Other than as separately indicated, this communication is being made on a ”private placement” basis and is intended solely for the professional / institutional recipient to which it is delivered.
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”Dow Jones,” ”UBS”, DJ-UBS CISM,”, ”DJ-UBS CI-F3SM,” and any related indices or sub-indices are service marks of Dow Jones Trademark Holdings LLC (”Dow Jones”), CME Group Index Services LLC (”CME Indexes”), UBS AG (”UBS”) or UBS Securities LLC (”UBS Securities”), as the case may be, and have been licensed for use by the Issuer. The securities issued by CSL although based on components of the Dow Jones UBS Commodity Index 3 month ForwardSM are not sponsored, endorsed, sold or promoted by Dow Jones, CME Indexes, UBS, UBS Securities or any of their respective subsidiaries or affiliates, and none of Dow Jones, CME Indexes, UBS, UBS Securities, or any of their respective subsidiaries or affiliates, makes any representation regarding the advisability of investing in such product.
Premature crude oil rebound on lower inventory build.
Policy easing expectations drive MSCI China A higher.
Oil rebound lifts the Canadian Dollar and Norwegian Krone.
Today’s policy easing in China is likely to lift commodities that were underperforming due to fears of weak demand from their largest consumer. Chinese equity markets had already pre-emptied such a move and had rallied last week. Oil traded higher last week on optimism that supply could tighten after US inventories increased at the slowest rate all year. As a result, commodity currencies such the Norwegian Krone and Canadian Dollar benefited. The somewhat premature rally may see a correction if hard numbers fail to follow the optimism.
Commodities
Premature crude oil rebound on lower inventory build. Last week we saw the lowest weekly increase in US crude inventories this year. It was taken as a sign that the glut in oil production is starting to come under control. Both Brent and WTI gained approximately 10% on the news. However, the market appears to be overlooking the OPEC report out last week which highlighted that the cartel’s production surged by 810,000 barrels per day in March. The global oil glut looks far from being under control and the OPEC cartel’s quest for market share is likely to lead to a pull-back in prices in the short-term. Tin fell by close to 10% last week as Chinese tin production rose to the highest level since 1997. Wheat fell 5.1% as more rain than expected fell in the US in key growing areas.
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Equities
Policy easing expectations drive MSCI China A higher. The MSCI China A-share index rose 5.6% last week. Even though Q1 2015 GDP met the target of 7%, industrial production, retail sales and fixed asset investment all came in below expectations last week, increasing the odds that that People’s Bank of China will need to lower the policy setting. By the weekend the PBoC announced that it will reduce the reserve requirement ratio (RRR, the amount banks have to hold in reserves with the central bank and hence cannot lend out). The RRR still remains very high by international standards and we believe the PBoC will cut the RRR further. European bourses generally traded lower as negotiations between Greece and its international lenders drag on. The Eurogroup of euro zone finance ministers is due to meet on April 24th to discuss the reforms needed in return for further aid. The success or lack thereof will determine whether optimism in European markets will return this week.
Currencies
Oil rebound lifts the Canadian Dollar and Norwegian Krone. Both the Canadian and the Norwegian economies are strongly linked to the health of the oil market. With oil prices in sharp decline in recent months, it is no surprise that the currencies of both countries have been poor performers. The lowest US crude inventory build was a shot in the arm for the Canadian Dollar (CAD) and the Norwegian Krone (NOK), it could be short-lived as the rally appears somewhat overdone in the near-term and net short futures positions are lengthening for CAD. Option pricing indicates that NOK is the most likely to decline against the USD. Meanwhile, the UK elections are likely to be the main focus for British Pound (GBP) investors, and the latest polls indicate that the result remains finely balanced. Election uncertainty will be a negative for GBP, so if volatility continues to rise, expect recent GBP gains to be quickly unwound.
For more information contact:
ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com
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Other than as set out above, investors may contact ETFS UK at +44 (0)20 7448 4330 or at retail@etfsecurities.com to obtain copies of prospectuses and related regulatory documentation, including annual reports. Other than as separately indicated, this communication is being made on a ”private placement” basis and is intended solely for the professional / institutional recipient to which it is delivered.
Third Parties
Securities issued by each of the Issuers are direct, limited recourse obligations of the relevant Issuer alone and are not obligations of or guaranteed by any of UBS AG, Merrill Lynch Commodities Inc. (”MLCI”), Bank of America Corporation (”BAC) or any of their affiliates. UBS AG, MLCI and BAC, Shell Trading Switzerland, Shell Treasury, HSBC Bank USA N.A., JP Morgan Chase Bank, N.A., Deutsche Bank AG any of their affiliates or anyone else or any of their affiliates. Each of UBS AG, Merrill Lynch Commodities Inc. (”MLCI”), Bank of America Corporation (”BAC) or any of their affiliates. UBS AG, MLCI and BAC, Shell Trading Switzerland, Shell Treasury, HSBC Bank USA N.A., JP Morgan Chase Bank, N.A. and Deutsche Bank AG disclaims all and any liability whether arising in tort, contract or otherwise (save as referred to above) which it might have in respect of this document or its contents otherwise arising in connection herewith.
”Dow Jones,” ”UBS”, DJ-UBS CISM,”, ”DJ-UBS CI-F3SM,” and any related indices or sub-indices are service marks of Dow Jones Trademark Holdings LLC (”Dow Jones”), CME Group Index Services LLC (”CME Indexes”), UBS AG (”UBS”) or UBS Securities LLC (”UBS Securities”), as the case may be, and have been licensed for use by the Issuer. The securities issued by CSL although based on components of the Dow Jones UBS Commodity Index 3 month ForwardSM are not sponsored, endorsed, sold or promoted by Dow Jones, CME Indexes, UBS, UBS Securities or any of their respective subsidiaries or affiliates, and none of Dow Jones, CME Indexes, UBS, UBS Securities, or any of their respective subsidiaries or affiliates, makes any representation regarding the advisability of investing in such product.
