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Crude oil recovery next year will boost the Canadian dollar: Analyst

The weak oil market is poised for some recovery in 2016, offering potential upside to the currencies of oil-producing countries, an analyst said Monday.

"The oil market is over supplied, doesn't look great in the short run, but there is still a recovery story for the second half," said Dominic Schnider, UBS Wealth Management's head of commodity and Asia-Pacific forex.

An uptick in oil prices will give some upside to oil currencies, particularly the Canadian dollar, which is also closely linked to a U.S. economy that is showing signs of a pickup, he told CNBC's Squawk Box.

The Canadian dollar, known as the loonie, is down 20 percent this year against the U.S. dollar amid a rout in energy prices that sent crude oil prices down about 40 percent so far this year.

U.S. WTI and Brent crude oil prices are now trading at multi-year lows around $38 a barrel due to a supply surplus on the back of growing production and as OPEC stands firm on its 30-million-barrel a day production ceiling.

UBS' Schnider isn't the only one who sees scope for oil to rebound.

Despite the slump and overall bleak outlook, prices are artificially low now due to year-end tax selling and a "massive disconnect between reality and what the future of oil prices will be," said Bill Smith, chief investment officer and senior portfolio manager of Battery Park Capital in New York.

Oil well site
Dan Riedlhuber | Reuters

The outlook is positive from both the supply and demand side, he said.

"The fact that there are multiple wars raging in the Middle East right now; you've got rig count in North America alone that are down 60 percent year over year, so there's a lot of capacity coming out," said Smith.

Demand will also be picking up, giving some upside to oil prices "sooner or later," he told CNBC.

Neither market watcher provided a price forecast and both calls for a recovery contrast against OPEC's World Oil Outlook report last week saying oil prices will take decades to recover and will still not reach the peak seen in recent years.

But if an oil rebound does materialize, it won't benefit all producers' currencies equally. Australia's currency, for example, faces greater headwinds, particularly from its mining sector.

The outlook for the iron ore market remains poor on the back of a structurally over-supplied housing market in China that will impact the demand for steel.

This means that the Australian dollar is likely to not perform well, even if prices of key export liquefied natural gas recover, as the mining sector remains bleak.

The Aussie dollar is down 10 percent against the U.S. dollar so far this year.

UBS' Schnider is predicting a high single-digit decline in the Australian dollar against the greenback in the next six to 12 months due to a slowdown in trade and high current account deficit.

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