If not for high oil prices, Canadian grain prices would be a few percent higher than what they are now.
Because Canada is a net exporter of oil and gas, it draws investment from currency traders when oil prices rise, causing the loonie to rise.
Because the United States is a net importer of oil and gas, high oil prices act as a weight on the U.S. buck.
Of course there are other factors in favour of the Canadian dollar, like a positive trade balance and a federal budget surplus, in sharp contrast to the twin trade and budget deficits in the U.S.
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But if oil was trading in the $40s US instead of in the $60s we’d probably see the dollar closer to 80 cents instead of 85. A weaker loonie would buoy the farmgate price of commodities traded in U.S. funds.
Oil prices fell last week as traders began to think demand might fall as high energy costs weaken world economies and intrude on consumer’s pocketbooks.
But few believe an oil price collapse is in the cards and several Canadian banks think the loonie will stay around the mid-80s through next year.
CIBC is the most bullish on oil prices and it is not surprising that it is also most bullish on the Canadian dollar, forecasting an appreciation to 88 cents in the fourth quarter and then a small retreat to 87 cents in the first quarter of 2006 and 85 cents in the second.
The Toronto Dominion sees 86 cents in the fourth, 87 cents in the first quarter of 2006 and 85 in the second. The Bank of Montreal sees 83 cents, 84 and 84 respectively.
It is interesting to note that futures prices for wheat, soybeans and corn on American exchanges are all equal to or higher than they were last year at this time.
Prices for Canadian grains are all lower.
Burdensome supplies in Canada are part of the reason, but so is the dollar, at 85 cents last week compared to about 80 cents last year.
