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The loonie’s value has been more or less ignoring changes in the oil price recently.

MARK BLINCH/REUTERS

Analysts from Bank of Montreal, Toronto-Dominion Bank and Bank of Nova Scotia are forecasting that the loonie will get a big boost from rising oil prices but, if that's the case, there's little sign of it yet. Bond yields continue to drive the bus where the value of the Canadian dollar is concerned.

Cited by Bloomberg, TD strategist Mark McCormick predicted a return to the close correlation between the loonie and West Texas intermediate crude prices that would push the Canadian dollar to 82 cents (U.S.).

"I think we'd start to see a recoupling of the correlation between commodity currencies – particularly [the Canadian dollar] – and oil prices if we're moving from $55 to $60," McCormick said. "Our oil guys think for the next year we'll be trading north of $60."

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The loonie's value has been more or less ignoring changes in the oil price recently, which is contrary to the historical trend. It's reasonable to expect that crude prices will reassert their influence in 2018, but the charts below show that this process has not yet begun.

The first chart shows how the Canadian dollar remains pinned to relative bond yields – the difference between Government of Canada two-year bond yields and two-year U.S. Treasury bond yields.

To an extent, the close relationship mirrors the global search for yield. To maximize income, global bond investors move assets between Canadian and U.S. fixed-income markets as yields in one country climb. The shifting of assets creates demand for the currency of the country where yields are rising.

The second chart compares the loonie with oil prices. The two assets have moved generally in the same direction in the past five years, but less so over the past 14 months. The dollar weakened despite generally rising oil prices from September, 2016, to April of this year. In the past month (weekly data to Nov. 10), the loonie has again been falling while oil climbs.

Scott Barlow, Globe Investor's in-house market strategist, writes exclusively for our subscribers at Inside the Market online.

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