Skip to main content

The Globe and Mail

Loonie no longer a petro-dollar, report says

Tim Smith/tim smith The Globe and Mail

It's simple, right? The loonie's flight above par with the U.S. dollar is explained by the soaring price of oil. Canada's dollar, like Australia's, is a "commodity currency." Canada is a net exporter of oil, so the loonie's flight path is about the same as the cost of crude. It's always been thus - or at least it's been thus for as long as anyone in financial markets cares to remember.







But that relationship appears to be breaking down. "We have found that the correlation between oil and the Canadian dollar has collapsed," Marc Chandler, global head of currency strategy at New York-based Brown Brothers Harriman, wrote in a client note on Monday.







The Canadian dollar is at its highest level against its U.S. counterpart since 2007, yet is actually among the weakest performers among the Group of 10 major currencies since Feb. 15. (Only the New Zealand dollar, which has declined 1.8 per cent, and the British pound have performed worse.) While oil prices have surged 25 per cent in the period, the loonie has gained just less than 2 per cent.

Story continues below advertisement







Brown Brothers conducts a correlation analysis on a 60-day rolling basis, using percent change. The correlation peaked at the end of last year, at about 0.76. The correlation is now -0.1. This is the first time the correlation has been inverse since the July-October period of 2007, according to Brown Brothers. (Between 1992 and 2002, the correlation was often inverse, but in recent years this rarely has been the case, according to Mr. Chandler.







Mr. Chandler offers some explanations.







One, Canada's energy exports are in fact dominated by natural gas, the price of which has collapsed.







Something else to consider, advised Mr. Chandler: while the western provinces export heavy crude to the United States, the Eastern provinces import light sweet crude. In 2009, for example, Canada exported 658 million barrels of oil to the U.S., and imported 313 million barrels from places such as Britain, Norway and Algeria.







Mr. Chandler's third explanation is the most compelling. The Bank of Internationals Settlements calculates that the Canadian dollar's share of daily currency market is 5.3 per cent, which works out to daily volume of about $100-billion. By comparison, Canada exports about $6-billion of oil to the U.S. each month.







"The dollar value of oil exports is a miniscule fraction of the overall turnover of the Canadian dollar in the foreign exchange market," Mr. Chandler wrote. "Capital flows are more important than trade flows."





Follow Economy Lab on twitter

Story continues below advertisement

Report an error Licensing Options
About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

Comments are closed

We have closed comments on this story for legal reasons. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

Combined Shape Created with Sketch.

Combined Shape Created with Sketch.

Thank you!

You are now subscribed to the newsletter at

You can unsubscribe from this newsletter or Globe promotions at any time by clicking the link at the bottom of the newsletter, or by emailing us at privacy@globeandmail.com.