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Do oil and loonie share the same flight path?



RICHARD BLACKWELL

From Wednesday's Globe and Mail, Wednesday, Jun. 03, 2009 04:06AM EDT



The Canadian dollar always seems to go up when oil prices rise. Is there a direct correlation between the two?


Basic trade theory suggests that when the price of a country's significant export product rises, and that commodity is a necessity, there will be increased demand for the country's currency and it will rise.

That's pretty much the scenario that sees the Canadian dollar rise when oil prices go up.

However, says economist Dale Orr, that theory is a simplification of the overall relationship between the dollar and oil prices, particularly in these complex times.

For one thing, the price of other commodities we export, such a forest products, metals and wheat, often have an even greater impact on the dollar.

And there are several other offsets. Among them: When higher oil prices weaken the world economy, our energy exports fall, putting downward pressure on the Canadian dollar.

As well, international investors often buy U.S. dollars as a safe haven, pushing it up against other currencies, including the Canadian dollar.

And significant parts of the Canadian economy weaken with higher oil prices - and higher gasoline prices - helping to dampen the dollar.


What's the relationship between the U.S. dollar and oil prices?



Generally, because the United States is a net importer of oil, higher oil prices tend to put downward pressure on the U.S. dollar.

Another theory, Mr. Orr says, is that a lower U.S. dollar actually causes oil prices to rise. There are a number of possible reasons behind this idea.

One is that derivative traders will buy oil contracts as a hedge when the dollar is down, pushing up oil prices.

Another theory suggests that countries that purchase oil will buy more when the U.S. dollar is down, because oil is priced in U.S. currency.

This would put upward pressure on oil prices.

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Has the federal government always been able to use the money it collects from employment insurance premiums as part of its consolidated revenue fund?


When Canada's employment insurance system was set up in the early 1940s, the idea was to keep the money from premiums within the government's general revenue fund, but in a special account that would be earmarked only for jobless benefits.

Ottawa soon bent its own rule and borrowed against the funds for wartime expenses during the Second World War, says Trent University professor Jim Struthers, who has studied the history of employment insurance.

Except for that case, the insurance premiums were generally kept separate and used to pay EI benefits until 1977, he said, when the government began to dip in to pay for job training, which became a part of its wider labour program.

By the 1990s, excess funds were being counted as an offset against the federal deficit, and they were a key part of the shift to an overall budget surplus.

In 2000, the auditor-general said the EI funds were essentially part of the federal government's overall revenue pool, and any distinction pretty much disappeared.

The Globe and Mail




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