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Canadian dollar's 'petro-currency' status may soon weaken, analysts say

Whither the loonie

Currency analysts at Bank of Nova Scotia believe the Canadian dollar’s “petro-currency” status may be about to weaken.

Don’t get the wrong idea. The loonie’s ties to oil will remain, but possibly weaken, according to strategists Shaun Osborne and Eric Theoret.

“Weak oil prices have been closely associated with the decline in the CAD over the past year (and more),” Mr. Osborne, the bank’s chief foreign exchange strategist, and his colleague Mr. Theoret said in a report, referring to the loonie by its symbol and to the U.S. crude benchmark, West Texas intermediate, or WTI.

“The correlation between spot and crude prices has been tight but may be nearing a point where its influence on the CAD weakens to some extent,” they added.

“This would not be unusual from an historic perspective and might reflect the evolving Canadian economic landscape.”

They noted the “phenomenon” of weak oil prices driving down the loonie, and vice versa, but also cited the fact that exceptionally high crude prices “were of no help” to the currency in 2008.

“For the CAD specifically at this point, we rather feel that the severe damage to the economy was wrought primarily by oil prices weakening below the average project breakeven for oil sands,” said Mr. Osborne and Mr. Theoret.

“Weaker oil prices are not helpful from here but will not impact the growth outlook for the economy radically,” they said.

“Moreover, there are signs that Canada’s economy is adjusting to lower oil prices.”

The loonie is weaker today, but notably still at about 71.5 cents U.S.

It’s softer because of the dip in oil, but still buoyed somewhat by the weaker U.S. dollar, said London Capital Group chief analyst Brenda Kelly.

“The CAD is losing ground but it’s in concert with other commodity currencies,” Ms. Kelly said.

“Risk aversion is gaining traction with crude oil prices continuing to take a hit.”

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Markets melt

Stocks are melting down this morning.

Hong Kong’s Hang Seng tumbled 3.9 per cent, while Japanese and Chinese markets were closed.

The scene is ugly in Europe: London’s FTSE 100, Germany’s DAX and the Paris CAC 40 were down by between 1.8 and 3.1 per cent as North American markets were getting up and running, also falling sharply.

“After a one-day respite, markets have gone back into meltdown on Thursday,” said analyst Jasper Lawler of CMC Markets in London.

“Almost every gauge of risk-taking is getting hammered lower, from U.S. Treasury yields to financial shares to the dollar-yen currency pair,” he added.

“Everybody knows the central bank-induced frenzy had to end sometime, and there are some flashing red lights saying that time could be now.”

Commodity companies hit

The commodities rout is taking an ever-greater toll.

Canada’s Cenovus Inc. today cut its dividend and its planned spending for the year as it posted a hefty loss of $641-million or 77 cents a share.

Precision Drilling Corp. suspended its dividend as its fourth-quarter loss swelled to $271-million or 93 cents a share.

“The land drilling industry is almost a year and a half into a deep downturn, a result of lower commodity prices pushing customer spending down and decreasing drilling demand,” warned chief executive officer Kevin Neveau.

“There is limited visibility with few positive market signals,” he added.

“In this protracted challenging environment, financial stability is paramount for both survival and sustaining competitive advantage.”

Overseas, Rio Tinto also unveiled a dividend cut as it posted a sharply lower profit.

Manulife Financial Corp., too, was hit by energy, though it raised its dividend as fourth-quarter profit slipped.

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