Tuesday's ETF to Watch: CurrencyShares Canadian Dollar

Aug.31.10 | About: CurrencyShares Canadian (FXC)

With American markets trending lower, the country’s largest trading partner, Canada, has managed to weather the storm better than most developed nations while simultaneously staying out of the debt crisis spotlight. However, the Canadian economy is not without risks, as high levels of unemployment and lower revenues thanks to slumping oil prices have been cause for concern. In fact, Canada announced on Monday that its current account balance sunk to negative C$11 billion, nearly one billion Canadian dollars off of analyst estimates, and more than C$3.2 billion lower than in the previous quarter.

This weakness compounded with the country’s high unemployment rate could suggest that a variety of Canadian products, including oil, are not as popular as they used to be, creating a potentially devastating turn of events for the traditionally export-focused nation. Investors will have an opportunity later today to gauge the economic health of our neighbor to the north as Canada reports second quarter GDP figures. Last period’s numbers came in at a robust 6.1% annualized rate, but economists are looking for a sharply lower number this time around; predictions are generally coming in at growth of just 2.5%. “It’s not like we were in a recession in the second quarter, but Canada’s current account behaved as if we were, providing a glimpse into what lies ahead for our external balance in a world of slow growth,” Krishen Rangasamy, an economist at CIBC World Markets, wrote in a note to clients. In other words, although Canada is not experiencing as much of a slowdown as other G8 markets, because the country is so dependent on exports to these nations it is likely to suffer as well [see all the ETFs which offer exposure to Canada by using our Country Lookup Tool].

However, should the country post growth exceeding 2.5%, it could have a doubly positive impact on the ‘loonie’ and push the currency back to within striking distance of parity with the greenback. First, a higher growth rate would suggest that some of the positives in the country, such as robust building activity levels and a solid banking system, are outweighing the expected downturn in exports. Second, a solid growth rate could also spur the Bank of Canada to continue its normalization process of interest rates, which would further boost the currency going forward.

With this report on tap, look for the CurrencyShares Canadian Dollar Trust (NYSEARCA:FXC) to be in focus during today’s trading session. The fund, which tracks the Canadian dollar relative to its American counterpart, has fallen 1.1% over the past two weeks and has dropped by a similar amount so far in 2010 as well. The fund charges an expense ratio of 0.40% and offers investors a low-cost diversifying agent; its beta is just 0.35.

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Disclosure: No positions at time of writing.

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