Pound Sterling to Canadian Dollar Softens on Oil Price Rise

May 18, 2015 - Written by Tim Boyer

STORY LINK Pound Sterling to Canadian Dollar Softens on Oil Price Rise

The Pound Sterling to Canadian Dollar exchange rate softened at the start of the week as the ‘Loonie’ received support from rising oil prices. Optimism that prices will recover strongly combined with fears over a possible supply disruption in the Middle East to send the value of the commodity climbing. As crude oil is Canada’s most exported commodity, a rise in prices is beneficial to the strength of the Canadian currency.

According to a report by BHP Billiton, cheap oil prices will not last for long and significant rises will occur over the next two to three years due to a lack of new oil discoveries. The report also suggests that natural gas prices will also stage a solid recovery.

Crude oil prices climbed back above the $60 per barrel level as fighting in Yemen and Iraq raised concerns that oil supplies out of the Middle East will be disrupted. The main driver of the price rise was news that the Islamic State took control of the western Iraqi city of Ramadi. Heavy fighting took place over the weekend and resulted in Iraqi government forces fleeing the city. The defeat was the worst seen since last year when Islamic State captured vast tracks of Iraqi territory.

‘Ramadi has been contested since last summer and ISIS now has the advantage. The loss of the city does not mean the overall Iraq military campaign was turning in Islamic States favour, but it will give the group a propaganda boost. That just means the coalition will have to support Iraqi forces to take it back later,’ said Pentagon spokesperson Elissa Smith.

In Yemen, the Saudi Arabian led Arab coalition resumed airstrikes against Houthi rebels as the five-day long humanitarian ceasefire ended late on Sunday. The conflicts in the Middle East have increased worries over oil supplies out of the region and sent prices rising as the commodity’s value is heavily influenced by supply-and-demand balance.

Further gains for the Canadian Dollar were restrained as speculation grows that the Bank of Canada could make more interest rate cuts over the coming months.

‘Even as the Fed begins a gradual rate hike cycle this year we think the Bank of Canada will remain accommodative, and will likely ease by another 25 basis points to 0.5% if growth disappoints as we expect,’ said economist Emanuella Enenajor.

The Pound Sterling could regain ground if Tuesday’s UK Inflation data comes in positively.

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