The Looniness of the Canadian Loonie and Oil Sands

Our neighbors to the north are facing a harsh reality these days… the ongoing devaluation of the Canadian Dollar, or better known as the Loonie. While it’s hard to take the Loonie seriously given its loonie name, it’s a major concern for Canadians and their economy. Despite rebounding around 10% from its 2016 lows, the Loonie is still down around 25% from its high 2011 highs.

Canadian Dollar 25 years(Disclaimer: Past Performance is not necessarily indicative of futures results)
Chart Courtesy: Barchart 

If you’re familiar with the makeup of the Canadian economy, many are blaming this downward move on crude oil’s recent drawdown, the largest drawdown in history. Just take a look at the 30 day rolling correlation of Crude Oil to the Loonie starting in 2014.

Canadian Dollar Crude Oil Correlation(Disclaimer: Past performance is not necessarily indicative of future results)

The correlation currently stands at 0.69 but was as high as 0.72 back in January. This week, the Royal Bank of Canada reported that crude oils implosion is the biggest contributing factor to the fall in the Canadian Dollar.

“Three Quarters: Proportion of the fall in the Canadian dollar’s exchange rate attributable to the decline in energy prices, according to Royal Bank.”

$25 billion: Cost of the plunge in oil prices to Canada’s economy.”

This makes sense when you consider that “mining, quarrying, and oil and gas extraction” made up 6.91% of Canada’s total GDP in 2015, and 23% of the goods-producing industry. To understand that number, we need to understand the way Canada produces oil. The majority of that mining or extracting is not for oil itself, but extracting a mixture known as oil sands.

What are Oil Sands?

Surprising enough, oil sands isn’t actually oil, but can be turned into oil. Oil Sands is an actual physical mixture of sand, water, clay and bitumen found primarily in Venezuela, The United States, Russia, and Canada. We can’t do the explanation justice, so we’ll let this quick 30-second video do the trick.

While many haven’t heard much about it, in Canada, it’s their biggest means of producing oil, per the Canadian Association of Petroleum Producers.

Oil Sands Canada ProductionSource: CAPP

2016’s Dilemma:

The issues lays in Canada’s planned expansion in the oil sands. For starters, there were 17 cancellations or delays of oil sands projects due to the continuation of low oil prices, which isn’t an optimistic outlook for a country the relies on oil production.

Currently, oilsands projects generally require oil prices of at least $60 to make money, although the facilities do have a long lifespan to recover capital investment and turn a profit.

With oil hovering around $40 a barrel, the market has a lot to make up before oil sands are able to make money again. Still, the Canadian government is planning on increasing oil production, while at the same time suggesting that the economy should find alternative ways to make up for that potential GDP gap.

Oil Sands Production Alberta

Source: CBC News

“The thing that really stuck out for me is that none of the pathways that they describe really define a future where you are really going to see a lot of additional development in the oilsands sector,” said Prof. Warren Mabee, an energy researcher at Queens University.

The Liberal government may, in Tuesday’s budget, begin to introduce policy to help diversify the economy away from oil, Mabee suggests.

“What we are talking about is a continued transformation,” said Mabee, who is director of the Queen’s Institute for Energy and Environmental Policy (QIEEP). “We are going to need other parts of the economy to really start picking up the slack.”

The Canadian Loonie and Oil

This growing correlation between the Canadian Dollar and Crude Oil is not an ideal situation for Managed Futures. Many Trend Following programs rely on what’s called market diversification, trading dozens of markets across the world to help control risk. However, the more the Canadian Dollar and Crude flow in tandem, the less diversification there is in a portfolio, the harder it is to control risk. To be fair, we are talking about a single market out of dozens so we don’t want to put too much emphasis on the correlation, although as we talked about last week, it seems that crude oil is influencing more than just the Loonie. We’ll have to see if this correlation persists, or if this could be a potential problem for diversification moving forward.

 

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.