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BMO chief economist Doug Porter noted Wednesday that the loonie was not tracking oil and general commodity prices higher as most Canadians would expect. In truth, it’s not that surprising – changes in the value of the domestic currency have been fickle, following different drivers closely at different times.

From the end of the financial crisis to the first quarter of 2018, predicting the course of the loonie was easy, and it had very little to do with commodity prices. The currency price closely tracked the two-year yield spread – the difference between domestic and U.S. shorter term bond yields. Global investors were moving exchanging their currencies to buy loonie-denominated bonds because the bond yields here were higher than Treasuries.

That correlation broke through 2018, however, and by the next year relative bond yields and the Canadian dollar were often moving in opposite directions. (I posted a chart on social media here) .

The Western Canada Select Crude price has been “on again/off again” as an effective indicator for the Canadian dollar’s price. The loonie closely tracked the oil price lower for the two years following June 2014, but from then to the pandemic the commodity price offered little if any guidance. (Chart here).

Beginning in March 2020, the loonie and the copper price have moved in tandem to the extent that they look like the same chart. In a sense, the domestic currency has become a reflation trade because of the economy’s reliance on global trade activity and commodity demand, particularly from China. The loonie’s recent weakness matched the downdraft in copper prices.

In the short term, I would expect that the domestic currency will follow the copper price but for how long is anyone’s guess. The loonie will track some combination of energy, metals and bond prices into 2022, but attempting to predict which driver will be strongest is not a wise occupation for investors.

-- Scott Barlow, Globe and Mail market strategist

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