CANADIAN DOLLAR (LOONIE)

Canada has experienced significant economic growth, surpassing $1 trillion of gross domestic
product (GDP). Its robust expansion led the Central Bank of Canada to increase interest rates to 4.50 percent as of July 2007. This currency’s fundamental personality
reflects its big sister, the United States. The United States is Canada’s major trading partner,
reflecting the fact that the U.S. dollar receives a weight of 86 percent in the tradeweighted
basket. Refer to Table 7.2d.
Therefore, when the U.S. economy slows, the Canadian economy also suffers. The
other major factor influencing the direction of the Canadian dollar, also known as the
“loonie,” is crude oil. Canada’s tar sands are an important magnet for capital, and Canada
is a net exporter of oil. When oil prices increase, the Canadian currency benefits. Figure
7.5 demonstrates the strong relationship between crude oil and the Canadian dollar.

The Canadian currency’s performance against a trade-weighted basket in 2006
shows a broader range than most currencies due to the decline in the price of oil (see
Figure 7.6).
From a fundamental point of view, trading the Canadian dollar against the U.S. pair is
the most effective way to play this currency. A useful web site for tracking the Canadian
economy is www.canadianeconomy.gc.ca/.




By ABE COFNAS