What it means
Canada introduced a one-dollar coin in 1987 to replace the paper one-dollar note, and the reverse side of the coin shows a loon, a common Canadian waterbird. People quickly began calling the coin the loonie, and the nickname spread to the currency as a whole.
Later, the two-dollar coin earned the nickname toonie. In financial news you may read that "the loonie rose against the US dollar" or that "the loonie slipped on weaker oil prices".
It simply means the Canadian dollar gained or lost value against another currency. The exchange rate is the price of one currency in terms of another.
The loonie is often described as a commodity currency because Canada exports large amounts of energy, metals and agricultural products. When prices of those goods rise, foreign buyers need more Canadian dollars and the currency tends to strengthen, although many other factors also matter, including interest rates and trade.
For businesses, the exchange rate matters whenever they sell to Canada, buy from Canadian suppliers or hold Canadian assets. A company that invoices in Canadian dollars must convert the money back into its home currency, so a falling loonie reduces the value of its sales.
The same logic applies in reverse for an importer paying Canadian suppliers, who is hurt when the loonie rises. Companies manage this risk in several ways, including invoicing in their own currency, using forward contracts to lock in a rate, or holding Canadian dollar bank accounts.
The nickname is informal, so formal documents and contracts use the code CAD instead. Forecasting the loonie is difficult, and even professionals disagree about its direction.
Businesses therefore treat exchange rate movements as a risk to be managed through policy and contracts rather than as something to be predicted. A clear written hedging policy, approved by the board, avoids ad hoc decisions made under pressure.
In practice
Real-world examples.
Example
A US furniture importer pays a Canadian supplier in Canadian dollars. When the loonie strengthens by 4%, the importer's costs rise by the same percentage when measured in US dollars, so it uses a forward contract to fix the rate.
Example
A Canadian software firm sells subscriptions to American customers in US dollars. A weaker loonie boosts its profit when the revenue is converted back, because its costs are mostly in Canadian dollars. Its finance team reports revenue growth both in US dollars and in constant currency, so that managers can tell real growth from exchange rate gains.
Example
A family from the United Kingdom plans a holiday in Canada and notices that the loonie has weakened, making hotels and car hire cheaper in their home currency. They decide to exchange part of their spending money early, to protect against a rebound in the Canadian dollar before they travel, and pay the rest by card.
Formula
Calculation
Value in US dollars = Amount in Canadian dollars x Exchange rate (US dollars per Canadian dollar)
Suppose an exporter is paid CAD 500,000 and the illustrative exchange rate is 0.74 US dollars per Canadian dollar.
Value in US dollars = 500,000 x 0.74 = $370,000.
If the loonie weakens to 0.70 US dollars, the same payment is worth 500,000 x 0.70 = $350,000.
The exporter has lost $370,000 - $350,000 = $20,000 purely from the exchange rate, a fall of $20,000 / $370,000 = 5.4%.Case study
Seen in the real world.
Maple Ridge Timber is an illustrative, fictional exporter that sells lumber to buyers in the United States and pays its workers and suppliers in Canadian dollars. The company invoices customers in US dollars and its finance manager watched the loonie closely.
One year the loonie strengthened from 0.72 to 0.78 US dollars. For every $1,000,000 of sales, the company's revenue in Canadian dollars fell from about CAD 1,388,889 to about CAD 1,282,051, a drop of roughly CAD 106,838, even though prices and volumes had not changed.
The manager responded by using forward contracts to sell US dollars at agreed rates for the next 12 months. In this illustrative story, the hedge did not increase profit, but it removed an uncontrollable source of volatility from the budget. The board also asked for a quarterly report comparing hedged and unhedged outcomes, so that the cost of certainty could be seen clearly.
Watch out
Common mistakes.
- Assuming "the loonie" is an official name, when it is a nickname and legal documents use Canadian dollar or CAD.
- Forgetting that exchange rates can be quoted in either direction, so 0.74 US dollars per Canadian dollar is the same as about 1.35 Canadian dollars per US dollar.
- Believing a strong loonie is always good, when it makes exports more expensive for foreign buyers.
Questions
People also ask.
Why is it called the loonie?
Because the Canadian one-dollar coin introduced in 1987 shows a loon on one side, and the coin's nickname became a name for the currency.
What affects the value of the loonie?
Interest rates, commodity prices, trade flows and global risk sentiment are all important influences.
What is a toonie?
It is the nickname for the Canadian two-dollar coin, a playful combination of "two" and "loonie".
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