Energy surges; Loonie rises

December 2, 2016 11:09 AM

The price of energy surged 8.33% this week. West Texas is trading at $50.75 per barrel in the aftermath of a surprise Organization of the Petroleum Exporting Countries (OPEC) production cut agreement at the group' meeting in Vienna. The shock came for the fact that after working on a similar deal since March of this year, the agreement has faced several public failures when it was only a freeze of production.

The production cut was announced in Algiers to some surprise as even limiting output have proven so hard, a cut seemed too optimistic. Meetings ahead of the Nov. 30 meeting did nothing but increase doubts as comments from Iran and Iraq showed them offside of the rest of the OPEC. In Vienna Saudi Arabia stepped up to absorb a bigger share of the production curb, but also managed to get Iran to reduce their output.

Non-OPEC member Russia also agreed to participate with other major producers seemingly onboard as well. The challenges for energy producers will become how to monitor this new agreement and avoid overproduction. The higher prices are a boon for U.S. shale producers that at one point targeted by OPEC to be run out of business, are now one of the biggest beneficiaries of the Vienna production agreement.

 

The U.S. dollar/Canadian dollar (USD/CAD) currency pair lost 1.565% in the past five days. The Canadian dollar has risen against the USD thanks to the effect the OPEC agreement had on energy prices. The high correlation between the loonie and crude has the currency trading at 1.3283 after touching three week lows in the aftermath of the production cut announcement. Canadian economic fundamentals have been mixed as the bulk of the economy has been dragged down by lower natural resource prices. Canadian employment surprised with 10,000 new positions added on a forecast of a loss of 17,000. The unemployment rate was lowered to 6.8 percent, but it does bear mention that those gains were mostly part time positions in the service sector and the participation rate fell to 65.6 percent.

Next week the Bank of Canada (BoC) is expected to keep rates unchanged and will mark a whole year the central bank stood in the sidelines after a proactive 2015 that included two rate cuts. The Canadian benchmark rate stands at 0.50% and with little room to cut it is close to resorting to more unconventional tools. Governor Stephen Poloz has not given any specific details on the monetary policy strategy for next year, but the market is aware the Canadian economy is heavily dependent on its U.S. counterpart as long as president-elect Trump does not modify that relationship as he intended to do on the campaign trail.

The Canadian government did make the BoC burden easier this year by announcing a fiscal stimulus package. While not accomplishing all of its goals it did show a willingness to spend in order to create jobs, but it was deemed too small to make a big difference. The U.S. is now about to embark in a fiscal stimulus push that could stoke American inflation and require the Fed to raise rates multiple times in 2017. The BoC will have to be aware of the growing interest rate divergence and what if any advantage a weak loonie has brought to the Canadian economy.