The loonie isn’t following oil prices any longer - nor much else
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The Canadian dollar, also known as the loonie, is no longer following oil prices or its historic drivers. BMO chief economist Doug Porter highlighted the lack of correlation between rising oil prices and the value of the loonie. In the past, a $10 move in the West Texas Intermediate (WTI) crude price would push the loonie higher by three cents, but since mid-June 2021, WTI is up almost 20% while the Canadian dollar is only up 10%. The disconnect is attributed to the US becoming a major oil producer and buying less foreign crude, as well as Canadian producers struggling to get their oil to global markets. The lack of correlation between crude and the loonie is not unprecedented, as relative bond yields and copper prices have also been more connected to the loonie in the past. The value of the loonie is currently influenced by international demand for domestic assets, with foreign money being sold in currency markets to buy Canadian dollars. However, the loonie is likely to remain weaker than traditional indicators imply as long as US equity markets and the US economy continue to lead the developed world. Canadian investors are motivated to sell loonies and buy US dollars and American assets. The lack of correlation between oil prices and the loonie suggests a potential end to the petroloonie phenomenon.
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