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Loonie Is Trading Low

Canadian Exchange Rate

How energy policy can affect exchange rate and why now is a great time to visit Canada.

When oil prices are in the $100 per barrel range, as they are now, the Canadian dollar has historically traded at or near parity with its U.S. counterpart. Given that the U.S. is importing record quantities of Canadian oil, the currency of the petrostate to our north should be doing very well.

So why is the loonie weak? There are two main reasons.

This oil boom is unusual in that it’s not being accompanied by an investment boom in new petro projects. A greener Canada means the loonie has decoupled from the oil price.

Exchange rates rise and fall not on absolute rates, but on relative ones. Right now, the markets expect the Canadian central bank to stop raising rates before the Fed does. That’s because Canada is more indebted than the U.S., making it “more sensitive to policy tightening” than we are, in the words of one FX analyst. The sooner the central bank is likely to stop tightening, the weaker the currency.

Axios Markets By Matt Phillips and Emily Peck · Jul 20, 2022

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