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Canadian Dollar and Commodities

|Includes:Jefferies TR/J CRB Commodity Index ETF (CRB)

Being from Canada, we have watched as our dollar has been in a decade plus bull market against that of the currency of our Southern neighbour. Currency trends tend to move in long term cycles as the determining valuation factors (think Government and Monetary Policy) tend to be relatively sticky, whereas equities ebb to shorter term cycles where their formative factors are more transitive in nature. In this regard, two relationships stick out as nearing points of interest in their respective relationships and are the subject of this note.

Firstly, it is no secret that the Canadian dollar is highly correlated to a variety of commodities as it is rightly seen by the marketplace as a “Commodity Currency” (like NZD and AUD). During points of low volatility, the relationship seems to be stronger then when volatility is high. As WTI crude oil has spiked to reconcile above $100, gold has recently reached new nominal highs and silver is at multi-decade highs, CAD has moved past parity with USD, but risen in a much smaller multiple; CAD appears to be reaching resistance levels set in the last commodity boom of late 2007/08 and may be ready to make a move back to below parity. Similarly, according to Bloomberg data on PPP, the Canadian dollar is about 20% overvalued relative to the US dollar. I interpret this data to mean that the CAD bull market may be somewhat tired at these levels and if commodity prices begin to stall or trend downward, the overextended CAD may feel the brunt of this effect.

If Canadians are over-weighted in commodities, it would be advisable to reposition their currency exposure to favour USD over CAD to mitigate some of their exposure risk.

USD/CAD Exchange Rate:
CAD-USD Exchange Rate

CRB/Reuters Commodity Index:
CRB Commodity Index

Stocks: CRB