As Goes Oil, So Goes the C$

The US economy has begun the 2nd quarter of 2015 with a continuation of the anemic growth that characterized the 1st quarter: Industrial Production for April declined b y .3% and the Empire State manufacturing survey does not show much improvement for May.

As I stated yesterday, with consumers not consuming, producers have to scale back. The US Federal Reserve thinks that this is temporary (as it was last year), however the consumer has more purchasing power with both the higher $US and lower oil prices, but at the moment this is not filtering back into the economy. Is it temporary or is it a structural and demographic and therefore a longer term phenomenon. 

BOC Governor Poloz has stated that he expects the US economy to pull the Canadian economy along in the 2nd half of 2015, as he expects that a weaker C$ (vs US$) will assist non-energy exports (and the US is Canada's biggest trading partner).

Lately, however, the C$ has been moving higher (as the US$ has fallen) and this is playing against his theory at the moment.

Currency traders have been "pegging" the C$ to oil prices since mid 2014 and this correlation, while usually short-term in nature, has continued.

Recently, since hitting a low near $45 in mid-March, oil has bounced back to near $60.

The $C has followed from a low of  near .77 to its current level above .83.

The future direction of Oil prices is going to be watched closely by Governor Poloz as he tries to gage the impact of  both Oil prices and the C$ on his projections for the Canadian Economy and the corresponding monetary policy if his expectations do not play out.

If the C$ gets too strong, Canadian non-energy exports could become less competitive and this scenario could become a drag on economic growth.

If Gov. Poloz lowers the bank rate, that could in turn push the C$ lower and give the Canadian economy a needed shot of adrenalin. It could also help if the US economy continues to under-perform.

Stay tuned.

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