Loonie and oil riding high together
As a major exporter of crude oil, the loonie tends to rise when oil prices go up and vice versa
By ATB Economics 17 March 2021 1 min read
When the pandemic was declared just over a year ago on March 11, 2020, the Canadian dollar was sitting at 73 cents U.S. Fast forward to March 15, 2021 and it was just over 80 cents U.S.
The loonie has not been this high relative to the U.S. greenback since early 2018.
At the moment, travel between Canada and the U.S. is limited due to the pandemic. Nonetheless, a high loonie is a boon to Canadians heading stateside but a setback for Canadian businesses that rely on U.S. visitors.
The same goes for importers and exporters. Canadians buying U.S. goods benefit from a strong loonie while exporters suffer.
As the Bank of Canada explains, “the value of the Canadian dollar rises or falls according to how much people in foreign exchange markets want to buy and sell it—that’s what makes it float.”
Currency traders make decisions based on a wide range of factors including the overall strength of the economy, interest rates, commodity prices, bond yields and inflation.
Because Canada is a major exporter of crude oil, the loonie tends to rise when oil prices go up and vice versa.
Sure enough, the loonie’s value plunged when oil prices crashed last spring but has been on the rise over the last few months as oil prices have improved.
What’s next for the loonie? Forecasting the exchange rate is not easy because there are so many variables that can shift it over the short- and long-term.
The outcome of a two-day meeting of the U.S. Federal Open Market Committee that ends today will have an impact as will what the Bank of Canada decides to do with regard to its quantitative easing program.
But, given the strong correlation between oil prices and the exchange rate, the loonie’s path is likely to continue to track oil prices.
The problem with this is, of course, that forecasting oil prices is also not easy because of the wide range of variables in play.
Answer to the previous trivia question: The total value of manufacturing shipments of tobacco products in Canada last year was $2.6 billion.
Today’s trivia question: When was the last time the loonie closed above the U.S. dollar?