I’ll look at two topics this week, starting with an assessment of the Canada-U.S. dollar exchange rate, which is running lower than you’d expect when crude oil’s value is more than US$100 per barrel.
Then I’ll pivot to my concern about this summer’s growing conditions in Canada and the United States, given weather models that show potential for a warmer and drier than normal growing season, especially south of the border, presenting a risk for yields.
The Canadian dollar on March 18 traded around US78.6 cents, a recovery from a recent low near 77.5 cents on March 9.
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Later this year the loonie could climb a little, especially if the Bank of Canada is as aggressive as the Federal Reserve in raising interest rates, but forecasters see a low-80s loonie, nowhere close to par value.
Most markets found more stable ground last week after being in panic mode in the days following Russia’s unprovoked invasion of Ukraine.
In addition to consuming all the events related to the invasion, including heavy financial sanctions on Russia, markets assessed monthly reports showing aggressive inflation running at 5.7 percent in Canada and 7.9 percent in the U.S. The Bank of Canada and the U.S. Federal Reserve both raised interest rates by a quarter of a point and pledged to continue raising them into next year to cool inflation.
Crude oil retreated from its recent peak above $128 a barrel on the West Texas contract but by the end of the week was running in the $104-$105 range, a level common back in the 2011-14 period, but well above more recent experience.
What might seem puzzling is that the time oil was around $100 the Canadian dollar traded in a range from 95 cents to $1.05.
Why is the loonie struggling to top 80 cents this time?
Part of the explanation is that whenever there is a global security worry there is a flight to safety, where investors sell riskier holdings and park their money in things they perceive as rock solid such as U.S. Treasury Bonds. This influx of money into U.S. dollar denominated bonds, or simply into U.S. cash, causes the U.S. buck to appreciate against other currencies, including Canada’s.
But even before the invasion the loonie had little momentum.
Last year, it was not clear how aggressive the Bank of Canada was prepared to be against inflation and whether it would match the Fed. The Bank of Canada disappointed some when it did not raise its rate at its January meeting.
But with the latest economic data showing a buoyant Canadian economy with falling unemployment, strong retail sales and soaring commodity prices, it is clear interest rates hikes are coming. Most expect Canada’s prime rate to be 1.75 percent by the end of the year.
Even then, the loonie might only edge up past 80 cents, because unlike past oil booms, this one is unlikely to spark multibillion-dollar capital inflows to oilsands and other energy projects.
In 2014, capital investments in Canadian energy peaked at about $120 billion. In 2020 the value had fallen to near $60 billion.
Investments in renewable or low-carbon energy and in mining will likely increase soon but oil projects are hampered by industry caution, investor reluctance and environmental hurdles.
Now let’s turn to the seasonal climate forecast.
On March 17, the U.S. National Oceanic and Atmospheric Administration, which includes the U.S. Weather Service, issued an outlook for April through June, which you can see at bit.ly/37Oo31y.
It shows a strong likelihood for warmer than normal temperatures for a large area including Texas, Oklahoma and Kansas and it also leaned toward warmer temperatures for all the Midwest.
Regarding precipitation, it showed a strong likelihood for dry weather in western Kansas and Oklahoma and northern Texas and leaned toward the possibility of the dryness extending through all the winter wheat areas of Kansas, Oklahoma, Nebraska, Colorado and Texas.
That is bad news for an area that is already dry and where the condition of winter wheat crops is already below normal.
And what is even more concerning is that as the NOAA forecasts move toward summer, the area of precipitation shortfalls extends north and east into the Dakotas and Iowa.
The potential is for a hot dry summer in U.S. corn, soybean and wheat areas.
Its North American maps show the potential for the summer dry weather extending into the Canadian Prairies, already suffering from long-term moisture shortfalls.
