Canadians looking for a clue as to which way the loonie is headed tend to keep an eye on the price of oil, but a better indicator for Canada's currency is actually a much more under-the-radar commodity.
Economist Doug Porter at the Bank of Montreal has pointed out a surprising correlation between the Canadian dollar and the price of copper, in the bank's morning commentary to clients Wednesday.
Oil is one of Canada's largest exports, so Canada's economy is heavily dependent on the oil market, with any moves higher or lower in the price of crude eventually translating into an uptick in Canadian GDP.
Similarly, the loonie has been derisively called a "petrodollar" as large run-ups or declines in the price of crude tend to eventually manifest themselves in the loonie's value.
The price of oil is often thought to be an excellent proxy for the health of the global economy — more demand for oil implies stronger economies around the world — but with countless uses in construction, electronics and other industries, it's copper that's a better gauge of the true health of the global economy.
On that front, Porter pointed out an uncanny correlation between the loonie and copper's price — and suggests if that's the case the loonie could soon be headed higher.
"The commodity that has the tightest correlation with the Canadian dollar in recent years is copper — not oil, not gas, not lumber, and not gold," Porter said.
As the loonie was swooning for the first few months of 2014, so, too, was the price of copper plunging. "But since the early spring, both have made a Lazarus-like comeback, with copper bouncing back to its best level in more than four months and the [loonie] close to where it started the year (and nearly where it stood a year ago)."
If the correlation holds as well as it has done dating back to at least the late 1990s, the price of copper could be suggesting there's upside to the loonie, Porter says.
"There are many specific factors that can knock this relationship off course, at least temporarily. But both copper and the loonie tend to ebb and flow with the broader fortunes of the global economy and the appetite for risk. So, the recent rebound in both prices is at least a mild thumbs-up for the global outlook," he said.
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