The implication here is that somehow the currency exchange rate is independent of WCS oil price in USD terms, which I find hard to believe if Canadian regulated banks are financing oil inventories in USD...
JPM: Without more softness in the loonie, the next domino In canada's oil patch could fall https://t.co/0dPh7Dr7Ye pic.twitter.com/QIX4RtPnsL
— Bloomberg Markets (@markets) January 18, 2016
The value of CAD is mainly driven by cross-border capital flows, not trade flows. The currency is not going to move fast enough to keep one particular commodity price constant in CAD terms; there are massive trade flows in other commodities, goods and services as well. As for financing, as the article states, the production costs are in CAD, so they would need CAD financing.
ReplyDeleteBrian from Ramanan's Kaldor thing the other day:
ReplyDelete"whilst a fall in commodity prices tends to be an effective instrument in moving the terms of trade against the primary producers, a rise in commodity prices is not likely to be nearly as effective in moving the terms of trade in their favour. It is partly also a consequence of an asymmetry in the behavioural consequences as between a gain and a loss of real income, the result of which is that any sudden shift in the distribution of world income, caused by a change in the terms of trade, is likely to have an adverse effect on industrial demand (in real terms)."
Here: "a fall in commodity prices tends to be an effective instrument in moving the terms of trade against the primary producers"
How are the new terms of trade quantified? They are quantified in the new exchange rate...
"there are massive trade flows in other commodities, goods and services as well. "
But if the price of those items does not change in USD terms then they dont matter...
Look at the dynamics in Fluid Balance in cell biology, you have Na and K in concentration on both sides of the regulatory membrane in equilibrium; now if Na concentration on one side is increased (you eat a whole bag of potato chips...), you just cant say, "well that doesnt matter because there wasnt any K in the chips only Na..."
https://en.wikipedia.org/wiki/Fluid_balance
If the K concentrations on either side are unchanged, then the resultant fluid flow will be solely based on the change in the Na concentration, but flow WILL result... and a new equilibrium state will be reached even though K concentration has remained unchanged...
this is the basic way regulated systems operate...
I would have to think about your fluid balance comments.
ReplyDeleteBut with regards to pricing - the prices of other goods and services are less volatile than oil, and so Canadian exporters are seeing rising CAD prices when they sell into the US. The manufacturers in eastern Canada are in much better shape than they were a few years ago. The only issue is whether demand will stable in the US.
Canada looks like a commodity producer from the perspective of investors because those are the firms that they can buy; but the real economy is somewhat more diversified.