Canadian dollar higher on Yemen crisis

The conflict in Yemen has escalated and has  reached center stage, pushing the prices of oil higher.

This in turn has  benefited the Canadian dollar against the US dollar – the latter has been on the back foot in recent days.

Yemen

Saudi Arabia began bombing the  Shiite rebels in Yemen. This came after the president was forced to flee out of Aden, following the takeover by the  militias of the capital Sana’a.

Political instability that has been going on for months in Yemen has  evolved into a regional crisis.  The country in the southern corner of the Arabian peninsula is only the world’s 39th oil producing country, but there two major things to consider regarding this:

1. Yemen sits on the  strategic straights of Bab-el-Mandeb  – the  passageway between the Indian Ocean and Asia to the Red Sea – leading to the Suez Canal and Europe. If the straights  shut down, ships will have to circumvent Africa in order to move between Asia and Europe.
2. Iran context: The rebels in Yemen are Shiites from the Houthi tribes. Iran is also predominantly Shiite. There are reports that Iran has been aiding the rebels, while Saudi Arabia is supporting the government. These two major oil producing countries, Iran and Saudi Arabia, have a long lasting feud. There is always a chance that this could turn from a proxy war of sorts to a full scale  and direct conflict. At the moment this seems quite unlikely, but markets react anyway.

Oil and CAD

The prices of oil are on the move, with WTI Crude Oil topping $50 and Brent getting closer to $60. This helps Canada’s oil exports, which have been suffering from oversupply coming from its backyard: the US.

But speaking of the US, there is still a scarcity of positive  economic surprises. The better than expected new home sales and inflation numbers were the exception and not the norm. Yet another fall in durable goods orders put the greenback on the back foot once again.

So, USD/CAD is already pushing on 1.24, extending its falls.