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Why the Canadian dollar is so “Loonie”!

By Sean Hyman | June 9, 2009

They say they call the Canadian currency the “Loonie” because of their bird called the “Common Loon”.

However, while that’s technically correct, I think that it’s called the “Loonie” because it’s kind of “bi-polar”. Ha-ha!

You see there are two major “pulls” on the Canadian economy. One of them is the “pull” that commodities have on their economy. On the other hand, the other “pull” is based off of how their biggest trading partner is doing: the United States.

The tough thing to determine when trading the Canadian dollar is when the focus is on the commodities side and when the focus is on the U.S. side.

As you know, the U.S. had led the world down into the latest recession. This was a horror story for Canada. After all, when the U.S. slows down, it doesn’t consume as many goods and it doesn’t need nearly as much (quantity wise of) commodities. Therefore, as the U.S. economy slows, so does their use of oil, timber and other commodities that Canada exports to their larger neighbor.

You can see this easily on the visual below. Click on the charts to enlarge them.

You can see by the GDP chart above, as the U.S. went into negative GDP growth (-2.5%), that Canada ended up in the same boat (-2.13%).

However, on the other hand, the Loonie can also do well when commodities do well. So how does one figure out this currency?!? I’ll tell you how I do it by the chart below.

If you have to say which side of the equation has more strength, I say it’s the side that assesses how the U.S. economy is doing. Why do I say that? The chart above shows which side has more strength.

In 2006 and most of 2007, commodities (like oil) and U.S. stocks (like the S&P 500) were going up…and the Canadian dollar (FXC) “ate this up”.

Note: As FXC goes up, you would want to be short the USD/CAD pair in the forex market to have the equivalent direction.

However, towards the end of 2007, you know what happened to U.S. stocks….they peaked! You can see this in the top of the chart above. However, in the very bottom of the chart above, you see that oil rally on for another 6 -9 months, yet the Loonie didn’t even notice it!

That’s why I say, when U.S. stocks are doing well (and especially when both U.S. stocks AND commodities are doing well), it’s time to be a buyer of the Loonie.

HOWEVER, even if commodities continue to head higher… IF U.S. stocks start to slump and the U.S. economy starts to slow down, it’s time to bail out of the Canadian dollar trade.

By the way, if the central bankers have it right…and we’re past the worst and “green shoots” are starting to pop up once again, then one should be a buyer of the Loonie once again. And this is exactly why investors have poured back into it. Because BOTH stocks and commodities have stabilized.

As long as that theme continues, then shorting the USD/CAD pair will be just fine. If, for some reason, U.S. stocks lose their momentum and start to head south again, then it would be time to bail out of your USD/CAD short position, in my opinion. Get a FREE, REAL TIME demo account to trade, here: http://www.fxedu.com/practice-forex-account

Sean Hyman

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