« Bygones are not bygones | Main | Excess supply and monopolistic competition, once again »


Feed You can follow this conversation by subscribing to the comment feed for this post.

Q: Suppose you had two exporting sectors - energy and manufacturing. Rising oil prices leads to rising currency - but once to get close to/above parity, the manufacturing sector can no longer compete (as per the graph MM provided earlier here: http://tinyurl.com/36gbsqj ) I'm not suggesting that's necessarily what's happening here, just wonder what it might look like.

Perhaps, but it's not clear why being competitive should be treated as a binary phenomenon, nor why the kink would happen be at 1.

Except the kink only occurs over less than one year before it rescinds if I'm reading the graph right (blue Dec 07- July 08, and then partly into the red).

I don't know enough about oil contracts (what pct is on spot market) but perhaps there is some lag in longer term deliveries if there is a sharp run up in prices - as occurred during this period.

The actual spike in oil prices was pretty narrow; there was a flat section from November 2007 - February 2010, so it was really just nine months. How much physical oil, in heavy grades, was actually transacted at these prices? If I recall correctly, refinery utilization was declining at the same time that crude prices were rising. How many physical supply contracts were signed at these prices? How many futures contracts were left open for physical delivery? Is there any particular reason why purely notional transactions on Nymex or ICE should have boosted CAD? Most physical oil is traded on the forward market, not the spot.

Suncor - avg sales price ($ Can) crude

Q1 '06 $65.75
Q2 '06 $75.34
Q3 '06 $71.99
Q4 '06 $60.65

Q1 '07 $65.61
Q2 '07 $71.01
Q3 '07 $76.97
Q4 '07 $82.36

Q1 '08 $96.16
Q2 '08 $121.12
Q3 '08 $116.32
Q4 '08 $61.53

Q1 '09 $59.14
Q2 '09 $59.00
Q3 '09 $61.70
Q4 '09 $64.81

I think we might be all taking the oil->dollar relationship too literally. Oil and the CAD/USD may both rise together because they're both denominated in USD, so increasing weakness in the USD will cause both to rise.

Factor in the Dow and see what happens.

Wow! That does look like a kink. If that thing were upside down, I would have said it's a short run wage-Phillips Curve, with a zero lower bound because zero is a magic number.

Yep, it's saying "focal point" to me. A dollar really is a dollar. Well, a little bit, anyway. Because some people think that some people think......that some people think it is a dollar. Where "some people" might include the Bank of Canada, somewhere along the line.

Either that, or forex market traders are math-challenged, and find it easier to multiply and divide by one.

What about the green line, Oct '07-Nov'07? Something big happened around then to put the whole scatter diagram out of whack. Maybe some new PhD hire devised a new and untested algorithm for currency trading. Or the old program had a Y2K-ish glitch at $1.09 .

JVMC - any volumes to go with those numbers? And any delivery date data? How much new capacity did the high price contracts induce?

I got them from the Suncor annual reports.

pg 102 (48 on pdf viewer) 2009:

pg 92 2007:

Volumes etc in tables above or below those pages.

"What about the green line, Oct '07-Nov'07? Something big happened around then to put the whole scatter diagram out of whack."

It only lasted 2 weeks, but I remember that time really, really well. Needless to say I was not a happy man.

Great post Stephen! In general, I think Mike Moffat is right in saying that both WTI and CAD/USD are 'driven' by US Dollar weakness. However, back in 2007/2008, there was definitely a kink in both relationships. When CAD/USD spiked up to $1.09 in November 2007 (the green period in Stephen's chart), it was accompanied by a proportionate increase in WTI, but it wasn't accompanied by an increase in USD weakness (measured by the US Dollar Index, or by EUR/USD strength).

The subsequent blue period where CAD/USD hovered around parity while WTI raced up to $147 was marked by profound US Dollar weakness with the US Dollar Index hitting all-time lows and EUR/USD trading up to $1.60 on multiple occasions. It appears that for the first 8 months of 2008, the Canadian dollar lost its correlation to both WTI and US Dollar weakness.

Thinking back to 2008, why didn't CAD/USD appreciate as the US Dollar weakened against every other currency? Understanding that period should be a clue to what happens next.

I can tell you that there was no significant backwardation in the futures market (maybe $3) even at the peak of the oil market, so forward transactions don't explain anything.  

The comments to this entry are closed.

Search this site

  • Google

Blog powered by Typepad