Unless we live near the border, most Americans regard our neighbors to the North as brothers, maybe not like the one that rebelled, but more like the gentler one that maintained lasting ties with his parents. There is a “French twist” that we do not understand, but then we are supposed to be different. As much as we would like to think that our economies are tied at the hip, the fundamental facts tell another story.

Western Canada is still bathing in the afterglow of the Vancouver Olympics. GDP for the area is up, as are housing prices, mainly driven by investments in mining, energy and construction. Prospects are bright. Similar bright spots can be found towards the East as well. Bank earnings are up, and inflationary pressure may force the Bank of Canada to raise interest rates in June from its paltry rate of 0.25%. The Canadian economy, which often predictably lags behind developments in the U.S., seems to be bucking this trend. As is the case with fundamentals, these favorable metrics have been reflected in the trends of the Canadian Dollar versus our greenback for the past year.

The Canadian Dollar, dubbed the “loonie” for the image of the aquatic bird on the C$1 coin, has been on a power trip for the past twelve months, appreciating over 10% and reaching parity with our currency in April for a brief moment, only to pull back. Yes, there has been a recent retraction due to sovereign risk issues in Europe, but amazingly enough, the CADUSD chart resembles a pattern very similar to our S&P 500 index. However, there is a much deeper correlation going on, specifically with oil prices.

Note: Past performance is not indicative of future results.

The Loonie seems to be inextricably tied to the fortunes of oil, and for good reason. When one thinks of oil, we conjure up images of oil sheiks of Arabian origin. However, Canada actually is a strong number two in the world in the category of known oil reserves, 33% behind Saudi Arabia, and 30% ahead of Iran. In case you are curious, we are twelfth on this hit parade and less than 12% of our northern neighbor’s stockpile. Looks like we better knock off the Canadian jokes for a while.

The Canadian stock market rose on Wednesday as the crude oil prices rallied 4%. The price action in the Loonie continued its roller-coaster ride with oil and settled in at around 5.3% below parity with the greenback. The current account deficit of $41 billion in 2009 is being addressed, and the Bank of Montreal announced quarterly earnings double those of last year. Are all things favorable with our Canadian brethren? Not quite. There is a real estate bubble developing.

Despite claims that Canada's cautious financial system has somehow prevented the negative effects of its housing bubble from coming to bear, the reality is that the day of reckoning has only been postponed, not prevented. Canadian banks may indeed be some of the safest in the world, but that is arguably largely because a government agency is holding all the toxic Canadian sub-prime mortgages for them and guarantee’s their performance. Canada's residential housing market is anything but a safe place to be at the moment. Government deficits brought on by mortgage guarantees could have an unfavorable impact on the currency’s relative value down the road.

The Canadian Loonie’s correlation with oil prices has been a trend one could count on for some time. However, its future price direction may be more dependent on the value of what’s on the land, rather than the resources that come out of it.