Canadian Loonie Defies Logic

Over the last few years, commodity prices, equity values, and interest rate differentials all favored Canada. By no coincidence, the Loonie rallied to such an extent that it soon reached parity with the USD. The relationship between these trends and the Canadian Dollar seemed so cut-and-dried that few analysts paid attention to anything else. In the last couple months, however, these relationships seem to have suddenly dissolved.

For example, as the price of oil has begun to rise again, the Loonie has unexpectedly lost value. Meanwhile, the inverse correlation between risk aversion and the Loonie has lost all validity, such that if the S&P 500 increases, the odds that the Canadian Dollar will also appreciate is essentially an even money bet.