-- The relationship between the Canadian dollar (CAD) and oil prices has weakened "materially" over the past decade, and the current episode is no exception, said Scotiabank.
Despite a sharp rise in oil prices amid the Iran war, the CAD response has been largely muted, noted the bank.
The apparent decoupling does not imply the relationship has disappeared, stated Scotiabank. There remains a meaningful underlying link between oil and the CAD, but not all oil shocks matter equally.
The bank's analysis showed the CAD responds significantly more to demand-driven oil price increases than to supply-driven ones.
Once the source of oil price movements is taken into account, the decoupling is largely explained, according to Scotiabank. Controlling for oil supply versus demand shocks, alongside interest-rate differentials and broad US dollar (USD) dynamics, fully accounts for the decline in the oil-CAD correlation, without the need to invoke time-varying elasticities or structural breaks.
The CAD upside remains limited in supply-led oil rallies, added the bank. By and large, the combination of supply-driven oil gains, weak global demand, and US dollar safe-haven flows argues for a subdued CAD response in the current environment.