As the U.S. dollar index has steadily advanced this month, the relative strength of the Canadian dollar has perplexed me. The Canadian dollar has long seemed overplayed to me as a commodity-positive play given the country’s heavy dependence on the health of the U.S. economy – which I continue to assume will perform weakly in the near-term – and given interest rates as low as those in the U.S. I finally found a reasonably good set of explanations for the Canadian dollar’s continued resiliency relative to the U.S. dollar in a recent WSJ article deceptively titled “Bank Of Canada An Obstacle For Canadian Dollar.” Here are some key points:
- The dollar is rising as traders bet on a stronger U.S. economy. Canada is a tremendous beneficiary of American expenditures: 78% of Canada’s exports went to the U.S. in 2008.
- Given the on-going global economic recovery, commodities in general continue to perform relatively well despite the U.S. dollar’s strength. Canada benefits from this recovery.
- Canada does not have sovereign debt issues (debt-to-GDP ratio is “only” 79%).
The Canadian dollar is now nearing 15-month highs against the U.S. dollar (see chart of the currency ETF, FXC, below). If the Canadian dollar can benefit from both a weak U.S. dollar and a strong U.S. dollar, I suppose that makes it a “can’t lose” investment. These developments must further frustrate the Bank of Canada.
*Chart created using TeleChart
Be careful out there.
Disclosure: no positions