Canadian Dollar: Recovery not just about Oil – Commerzbank

Commerzbank’s Michael Pfister argues Canada’s recent economic improvement is not solely driven by higher Oil and gas prices linked to the Iran conflict. He notes real energy exports bottomed last August and have risen steadily, while labour market and GDP data show services and non-energy sectors leading the upturn. He concludes sustainable Canadian growth and reduced tariff uncertainty are prerequisites for Bank of Canada hikes and a lasting Canadian Dollar recovery.

Broader drivers behind Canada’s upturn

"While it is true that US exports in particular have risen significantly since March - a trend that is almost certainly attributable to the conflict in Iran - these figures are not price-adjusted. In real terms, energy exports reached their lowest point in August last year and have been rising steadily ever since; the trend since March has been more of a continuation than an acceleration."

"Labour market figures also suggest that a low point was reached last summer. The goods-producing sector accounts for only a small part of the labour market anyway, and within the energy sector, only a very small proportion of the workforce is employed."

"While a positive impact from the oil and gas sector on GDP was observed in April and May, this was not the case in March, when energy prices rose most sharply. Canada’s recent return to stronger growth was therefore primarily due to other sectors."

"The Iran conflict cannot change this. It is only once the Canadian real economy has recovered sustainably that the Bank of Canada is likely to consider interest rate hikes, and it is only then that the CAD is likely to recover."

"In short, the figures suggest that the real economy is slowly recovering for other reasons. The recovery in the PMIs, the rise in exports and stronger growth suggest that uncertainty surrounding tariffs is gradually easing. While this means that the oil price is a decisive factor for the CAD in the short term, in the medium term it is likely to be the negotiations with the US that determine whether the upturn is sustainable. "