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 2012 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!
The charts of oil and USD/CAD in 2012 are practically mirror images of each other, which means that oil and the Loonie moved in the same direction on many occasions this year. From January to April, both assets showed a lot of sideways action. Oil and the Loonie then proceeded to decline sharply, eventually bottoming out in June. Afterwards, the two staged a strong comeback, rallying from July to mid-September. But since then, the two have slid back from their September highs.
I found it particularly interesting how oil prices and USD/CAD simultaneously staged major reversals as they hit major psychological levels. When oil bottomed out at 80.00 in June, USD/CAD found resistance at 1.0300. Likewise, when oil reached and turned back from 100.00 in September, USD/CAD found support at .9700. Now, it seems as though oil is struggling to cross the 90.00 mark just as USD/CAD is battling with .9900.
It's clear to see that aside from risk sentiment and fundamentals, oil also plays a big factor in Loonie price action. So the next time you think of trading USD/CAD, do yourself a big favor and take a peek at your oil charts. It could just give you critical insight to help you bag some Loonie pips!