Forget Justin Trudeau, it’s oil that’s really driving this loonie rally

, Crisis

Newly installed Prime Minister Justin Trudeau is winning rave reviews at home and abroad, but that's not what is driving the loonie higher.

It’s giddy times in Canada, with newly installed Prime Minister Justin Trudeau winning rave reviews at home and abroad, the nation’s economy generating some of the best positive surprises in the world and the domestic stock market soaring again.

And yet all foreign-exchange traders seem to want to know is what’s the latest price for crude oil. While Canada has made progress to lessen its dependence on the commodity, the local dollar’s correlation to oil has climbed, hovering near record-high levels touched in 2012, according to data compiled by Bloomberg.

loonie

Though that hasn’t been a bad thing, as the rebound in crude since mid-February has helped push the loonie higher, it shows that amid all the optimism ushered by Trudeau and his plans for deficit-spending economic stimulus, energy prices remain the major driver of Canada’s currency. The risk for bullish traders that have ridden the more than 15 per cent rally in the exchange rate since mid-January is that the glut in oil that hasn’t gone away causes a reversal in prices.

“The Canadian dollar is all about oil,” said Jennifer Vail, head of fixed-income research in Portland, Oregon at U.S. Bank Wealth Management, which oversees about $125 billion. “Monetary policy, growth outlook, inflation outlook — all of those are certainly a component of the Canadian dollar, but the primary driver remains oil.”

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