Connection between Oil, the Canadian Dollar, and the Norwegian Krone

In this article, we will estimate connection between the oil price and the rates of the Canadian dollar and the Norwegian krone.

Oil is the most critical energy source in the world. It accounts for 33% of global energy consumption. It has high energy intensity and is convenient for transportation that makes it almost an indispensable energy resource. 

Oil as the major energy raw material is the base of economic resilience of most of the developed global economies. Among them are the Canadian and Norwegian economics.

Canada and Norway depend on raw material export including oil which is a significant part of overall volume of the exported commodities. That is why, the currency pairs including the Canadian dollar and the Norwegian krone are highly volatile and more liquid. And some similarities in price movements for oil and these currencies are identified with the analysis of price data.

The Canadian dollar and oil

Modern Canada is a large world manufacturer and exporter of oil products. By volume of oil reserves (approximately 15% of global), it is second only to Venezuela and Saudi Arabia.

The Canadian dollar is the basic commodity currency of the American region.

The influence of the American dollar on the Canadian dollar is very strong as the main consumer of the Canadian commodities and goods is the USA.

The USDCAD currency pair or luni is one of the seven basic currency pairs which is, according to the data of the Bank for International Settlements, around 8% of the total turnover of the forex market and together with crosses is around 10%.

For the Canadian economy, «black gold» is a significant part of the income of the country’s budget.

Statistically, the correlation between the Canadian dollar and oil is about 70% but this connection recently becomes weaker and more complex.

Let us identify correlation between changes in oil prices and the rate of USDCAD by week for the period of 32 years using correlation coefficient:

Correlation coefficients between changes in oil prices and the rate of USDCAD are negative for the whole period under our review. A moderate negative correlation is estimated at the 14th week of the year.

The correlation coefficient for the whole period is equal to -0.265. So, a weak inverse correlation between changes in the price for oil and the rate of USDCAD.

The Norwegian krone and oil

In Europe, the major hydrocarbon fields are in the northern seas. Norway and the United Kingdom have access to them. While, most of the extracted energy resources are consumed independently by the British. Norway contributes to the export sector.

The Norwegian economy is significantly represented by the oil and gas industry that makes the Norwegian krone a commodity currency which depends on the oil price.

This is not to say that the government economy depends entirely on the petrodollar but the government has been conducting an active policy of removing Norway from “the oil curse”.

Let us identify connection between changes in the price for oil and the rate of USDNOK by week using correlation coefficient:

Correlation coefficients between changes in prices for oil and the rate of USDNOK are negative for the whole period under our review excluding the 2nd and 3rd weeks. A moderate negative correlation is estimated at the 53rd week of the year.

Correlation coefficient for the whole period is equal to -0.213. It means that a weak inverse correlation between changes in price for oil and the rate of USDNOK has been identified.

Detailed results are shown in the Appendix:

XLSX (0.01 MB)Application to the article 'Oil's relationship to the canadian dollar and Norwegian Krona'.xlsx