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For years, it was a rock-solid relationship: When oil prices would climb, the Canadian dollar would get a lift, too.

But that bond has broken down. Oil prices rallied this week to seven-year highs, partly because producers are showing restraint in ramping up output. West Texas Intermediate crude, the U.S. benchmark, has jumped 50 per cent over the past year to more than US$90 a barrel. The Canadian dollar, meanwhile, has mostly been treading water over that time and stalled near 79 US cents this week.

The loonie struggles to take flight

West Texas Intermediate (US$/barrel)

CAD/USD

$1.1

$125

1.0

100

0.9

75

0.8

50

0.7

25

0.6

0

2009

2011

2013

2015

2017

2019

2021

the globe and mail, Source: bloomberg

The loonie struggles to take flight

West Texas Intermediate (US$/barrel)

CAD/USD

$1.1

$125

1.0

100

0.9

75

0.8

50

0.7

25

0.6

0

2009

2011

2013

2015

2017

2019

2021

the globe and mail, Source: bloomberg

The loonie struggles to take flight

West Texas Intermediate (US$/barrel)

CAD/USD

$1.1

$125

1.0

100

0.9

75

0.8

50

0.7

25

0.6

0

2009

2011

2013

2015

2017

2019

2021

the globe and mail, Source: bloomberg

What’s behind the weaker link? In a recent note, Bank of Montreal chief economist Doug Porter said higher oil prices don’t give Canada the same economic bump they used to. Capital spending by oil and gas firms has never recovered from the 2014-16 price crash, while the U.S. has become a crude producing superpower in its own right. Pipeline constraints also make it tough to move higher volumes of pricey crude.

“With export capacity out of their hands, producers have been using their income to pay down debt rather than invest,” Stephen Brown, senior Canada economist at Capital Economics, said in a recent report.

Another key factor is the Federal Reserve, Mr. Porter said. The U.S. central bank is quickly paring back its monetary stimulus and seems certain to raise interest rates soon, which has driven more demand for the greenback – and kept a lid on the loonie.

On the upside, higher oil prices will deliver a welcome boost to provincial coffers, right ahead of budget season.

Decoder is a weekly feature that unpacks an important economic chart

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