USD/CAD: Oil Backwardation Helps Loonie

The US dollar is lower against the Canadian dollar on Monday morning with strength in the Chinese renminbi pressuring the greenback while oil prices holding above multi-month lows aided the Canadian dollar. FX Trading volumes are expected to be more muted with US stock and bond markets closed for the Presidents Day holiday.

USD/CAD was down by 15 pips (-0.12%) to 1.3252 with a daily range of 1.323 to 1.326 as of 9.30am GMT. The currency pair fell very slightly on Friday by -0.11% meaning a weekly drop of -0.44%. Today’s declines take it close to two-week lows.

Canadian dollar – An increase in the price of oil helps the Loonie

A pickup in the price of oil is allowing a little Loonie strength because of Canada’s status as a net oil exporter. The benchmark US oil contract, WTI crude rose 5.2% last week after having touched one-year lows. Investors are expecting a quick turnaround in oil demand once the travel restrictions brought in because of the coronavirus are concluded.

Signs of a short-term spike in oil demand are emerging in oil contracts which have gone into backwardation. That is where near-term futures contracts are priced higher than longer-term contracts. Normally longer-term contracts are priced higher to account for the cost of storage. Backwardation happens when there is expected to be stronger demand in the present than in the future. In this case China and other Asian counties are expected to sharply increase oil demand once oil tankers can dock and cancelled flights are permitted again.

The Canadian dollar had been supported at the end of last week by comments from Governor of the Bank of Canada Stephen Poloz that appeared to row back slightly from the last policy meeting where the door was opened to a rate cut in the coming months.

The dollar

The Chinese yuan is pegged in a manage float against the US dollar so whenever there is bout of yuan-strength, all else equal that can weigh on the US dollar. On Monday, the yuan strengthened when the Chinese government announced plans for new fiscal stimulus measures to support the Chinese economy from the any fallout from the coronavirus.

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