What is a Loonie?

What Is a Loonie?

In forex terminology, the ‘loonie’ is a nickname for the US dollar vs Canadian dollar (USDCAD) currency pair. The term is derived from Canada’s $1 coin, which has a picture of a common loon (a bird) on the back side.

USD/CAD is a major currency pair and is heavily traded by both traders and institutions all over the world. Major currency pairs involve the currencies euro, US dollar, Japanese yen, pound sterling, Australian dollar, Canadian dollar, and the Swiss franc. The major currencies are those in which most of the world’s foreign transactions are denominated, which means they are the most liquid. They are also the currencies that countries most commonly value their own currency against.

The USDCAD market typically shows a negative correlation with other US based currency pairs, such as the EURUSD, GBPUSD and AUDUSD, and is one of the most liquid currency pairs in the forex market.

Both USD and CAD are also known as a petrocurrency, which means that they are the currencies of oil producing nations.

In the example above, the green and red bars represent the loonie, while the white and blue bars represent oil. As you can see, the USD/CAD is negatively correlated with oil, meaning a rising oil price would typically mean a falling USD/CAD rate. If we were to flip the oil chart, however, then both markets would behave very similarly, as shown below.

The Importance of the Loonie in the Global Economy

The Canadian dollar is still among the top 10 most traded currencies on the Forex market. In the first decade of the new millennium, the loonie was among the best performing currencies against the USD, thanks to Canada’s burgeoning exports of energy and commodities.

This changed in the wake of the 2008 financial crisis, when the loonie fell sharply in value against the USD, as most investors sought the safety of American assets. In the following years, the loonie rallied, mainly due to the strength of the Chinese government's infrastructure-focused stimulus efforts, which saw increased demand for Canada's natural resources, such as raw materials and oil.

The value of the loonie again started to depreciate in 2014, due to the softening of the international oil markets. From a peak of 1.05 CAD to 1 USD, the loonie fell to a value of fewer than 70 cents per US dollar in early 2016. In the past six years, the loonie has again somewhat recovered, as it moves in lockstep with the price of oil and other commodities.