The Canadian dollar, which is also referred to as the loonie has definitely attracted a lot of attention over the last few years; however there are some important factors traders need to know about the loonie before jumping into the marketplace.

Most currencies are driven by fundamental factors, for example: the stronger a country’s economy is the stronger its currency. High interest rates and unemployment figures can also cause major shifts in a country’s currencies; however, the Canadian dollar is also impacted by movements in commodity markets. Because the Canadian economy has a strong natural resource sector, the loonie is considered to be a commodity currency and the main commodity that drives it is oil. Another example of a commodity currency is the Australian Dollar, which has a strong correlation with gold and the mining sector. For now this article is just going to focus on the Canadian dollar.

So if a trader is going to play the Canadian dollar, he also needs to pay close attention to oil prices. In 2008, just before the first economic meltdown, which is associated with the collapse of Lehman Brothers, oil prices hit its highest price ever at $148.47 a barrel; at the same time Canadian dollar futures crashed through parity with the American dollar and hit a high 1.1043. Unfortunately oil prices were unsustainable and a few months later prices were hovering just above $40 a barrel. The drop had just as dramatic effect on the Canadian dollar, which hovered just above $0.7500. Because the Canadian economy weathered the economic storm, the loonie manage to recover and rallied through 2009 and 2010, which also has some correlations with oil prices. For most of 2010, oil prices were in a strong uptrend; unfortunately oil prices hit strong resistance around $114 a barrel and for most of 2011 has been in a strong downtrend. The latest drop had a major impact on the loonie, which dropped below parity with the U.S. dollar for the first time since December 2010.

Traders need to pay close attention to 0.9500, which is acting as a strong support area. If the global economy continues to deteriorate the loonie could end up bouncing in a tight range, with resistance around 1.0000. The recent selloff in the Canadian dollar has highlighted some short-term weakness. Currency analysts from Royal Bank of Canada, said in a recent research report that they are expecting USD/CAD to push higher in the near-term. “The recent low at 0.9408 now serves as initial support -and this level will have to be pierced in order to initiate another bearish phase for USD/CAD,” they wrote in the report.

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