Here’s why oil prices, the Canadian dollar and stock markets are all up
Canada has been presented with some promising economic news over the last few days, largely thanks to a strengthening Canadian dollar and news that OPEC agreed to cut its oil production for the first time in eight years.
On Wednesday, optimism over the OPEC deal had a positive effect on the stock market, driving the commodity-heavy S&P/TSX composite index in Toronto up 83.04 points, with the energy sector recording the largest rise, surging by nearly eight per cent.
The price of oil continued to surge on Thursday, rising another four per cent to just over US$51 a barrel.
Oil prices have also boosted the Canadian dollar, which rose by almost two-thirds of U.S. cent on Thursday to trade above 75 cents U.S.
These positive trends are somewhat obvious to economists – but not so much to the average Canadian. Here is the low-down on why oil prices, the Canadian dollar and markets are trending upwards:
Our dollar is driven by oil
The first thing any economist will tell you about the loonie is that it’s largely driven by oil prices.
OPEC, otherwise known as the Organization of the Petroleum Exporting Countries, collectively produces more than one-third of the world’s oil. They agreed to trim production by 1.2 million barrels a day starting in January – which is a good thing for oil prices.
“When you have a cut in production that tightens up on supply, when you have less supply it sends oil prices higher,” said Neil Shankar, economist at Toronto-Dominion Bank. Shankar noted he expects to see oil prices remain around the current level over the next few months.
“Canada is a really oil-dependent economy, out west we have the oilsands, and given the fact that we now have oil prices trending higher we should see our dollar gain strength for the next little bit.”
WATCH: What an OPEC oil production agreement means for Canada
Donald Trump had a bit of an influence on the stock market
Global markets have been trending upwards since Republican Donald Trump became president-elect of the United States, which some say is due, in part, to Trump’s campaign touting several promises to boost the economy.
“I think there is a lot of uncertainty still if some of the stuff he campaigned on is going to be implemented, but what we have seen so far is a very optimistic approach,” Shankar said.
Avery Shenfeld, chief economist of CIBC Capital Markets, said while the U.S. stock market has been climbing in part on enthusiasm that Trump’s administration might lower personal taxes, it could lead to uncertainty for the Canadian market.
“The enthusiasm from some voters in the U.S. is that they are going to promote U.S. production, if they were to do that it would be bad for Canada,” Shenfeld said.
“[But] the post-election rally will, at some point run, out of steam until we see what the new president actually brings.”
But, a good economy could mean higher interest rates in the U.S.
With higher oil prices and a strengthening dollar, things might be looking pretty rosy. But that could change when the U.S. Federal Reserve meets in two weeks time.
“To me it’s a good thing when the economy does well, it means growth, job creation, people are getting a steady income – but that also means because economic activity is ramping up, the Federal Reserve steps in and increases rates,” said Jennifer Lee, senior economist at Bank of Montreal.
What does a hike in interest rates in the U.S. have to do with us, you ask? According to Lee, an increase in rates from the Federal Reserve will strengthen the U.S. dollar – and that weakens our dollar.
“If their dollar is higher, ours weakens, which is good for exporters,” said Lee. “For anyone who wants to do cross border shopping it’s not so good.”
— With files from the Associated Press
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