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Updated from its original posting on Dec 8, 2012

The Special Relationship Between Oil and the Loonie

Some of you may already be familiar with the special relationship between oil prices and the Canadian dollar. For those of you who aren’t, let me fill you in on what you’re missing!

There’s a reason why Canadian dollar traders keep track of oil prices— the two often move hand in hand. When oil prices move down, it’s not uncommon to see the Loonie follow suit. Conversely, rising oil prices are usually accompanied by Loonie rallies.

Why do these two share such a strong bond? It has a lot to do with Canada;s economy.

Canada happens to be the world’s seventh largest oil producer. In fact, it’s the U.S.’s main supplier, as it sends about 2 million barrels of oil a day to its southern neighbor. Since Canadian dollars are needed to purchase and move oil across the border, the demand for oil tends to have a direct impact on USD/CAD price action.

Reviewing the Oil-Loonie Correlation

We’re well aware of the strong direct relationship that oil prices and the Loonie have had historically. But how has the oil-Canadian dollar correlation been recently? Does the strong correlation still hold true? Take a look at the charts below and see for yourself!

A lot of things have changed since the past year. For instance, Justin Beiber and Selena Gomez aren’t together anymore and the U.S. and the U.K. both lost their triple-A credit ratings. However, some relationships lasted more than the others, just like the Loonie’s relationship with oil.

In 2012, crude oil futures hit its yearly low shortly after the Loonie hit its yearly low against the dollar just below 1.0450 around June. Then, as the comdoll traded higher, so did oil. The commodity didn’t hit a peak for the year when the Loonie did but it’s clear to see on the charts that the positive correlation stayed intact well into the end of 2012.

Heck, if you look at two assets from late October to December, you can actually say that USD/CAD seemed to have found resistance at crude oil’s highs and support at the commodity’s lows!

I guess it’s safe to say that aside from risk sentiment and fundamentals, oil also plays a big factor in Loonie price action. Looking at USD/CAD and crude oil futures for 2013, I couldn’t help but wonder if we would continue to see the currency pair react strongly to the commodity. What do you think? Will we see a bounce on USD/CAD around crude oil’s previous highs?