Canadian Dollar Suffers Historic Decoupling from Oil Prices
The Canadian Dollar has historically traded closely with global oil prices, but recent trends suggest something is amiss. The loonie's decoupling from oil prices has reached a historical high, with two notable spikes in Brent futures prices in 2022 and now resulting in no meaningful lift to the Canadian Dollar.
A regression analysis of the $/CAD exchange rate on the 2-year rate differential with the US, the Brent oil price, and the VIX (market's expectation for volatility in the S&P 500) shows that the Canadian Dollar should be stronger than it currently is. The correlation between oil prices and the loonie clearly breaks around COVID-19.
The analysis suggests that the Canadian Dollar is significantly undervalued relative to where the 2-year differential, Brent oil price, and VIX put it, with a scale of undervaluation unprecedented in historical terms. This decoupling may be part of a larger issue affecting commodity currencies, including the Australian Dollar and the Brazilian Real.