The Canadian Dollar Correlates With Crude Oil
Summary
- Canada is a mineral and energy-rich nation.
- The Canadian dollar has declined since 2007 and 2011.
- Near the bottom end of the trading range, but trending higher.
- Book value in the U.S. neighbor to the north.
- FXC moves higher and lower with the C$ versus US$ currency pair.
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I am a huge hockey fan. I grew up in Brooklyn, N.Y., and for over half a century, I supported the New York Rangers. As a season ticket holder, I had to endure the chants of "1940" from those who despised my team, the year the Rangers hoisted Stanley Cup. In 1994, the Rangers finally won the trophy as they defeated the Vancouver Canucks in seven games. In 2014, the Rangers made it back to the cup final, but they lost to the Los Angeles Kings as Alec Martinez scored the winning and season-ending goal in game five in overtime.
I moved to Las Vegas eight years ago. In 2017, before the start of the 2017-2018 season, I gave up the Rangers to give my full support to my new home team, the Las Vegas Golden Knights. The VGK has turned out to be one of the most exciting teams in the history of the sport.
I look forward to the day they lift their first Stanley Cup at T-Mobile Arena on the Las Vegas strip. A few weeks ago, the Knights acquired Alec Martinez from the Kings, which could turn out to be a reversal of fortune.
When you think of Hockey, Canada immediately comes to mind. The US neighbor to the north is the heartland of the support. Aside from hockey, Canada is a wealthy nation, rich in natural resources and agricultural products. Canada is a leading producer of energy, and its currency tends to move with the price of crude oil. The Invesco Currency Shares Canadian Dollar Trust (NYSEARCA:FXC) reflects the US versus the Canadian dollar currency pair.
Canada is a mineral and energy-rich nation
Canada has a marginally larger landmass compared to the United States, but the US has over eight times more people than its neighbor to the north. Both Canada and the US both have around the same landmass as China, which is home to almost 1.5 billion people.
Canada is the home to vast raw material and agricultural resources. The top exports in 2019 were:
Source: Canada's Top 10 Exports
While Canada exports a host of products and raw materials, energy accounted for 22% of total shipments. Canada's long border with the United States and over eight times the addressable market of consumers makes the US the destination for over three-quarters of Canadian exports.
Source: Canada's Top Trading Partners
The chart shows that while the US is the destination for the lion's share of Canadian exports for logistical reasons, China is second because of its vast population.
The Canadian dollar has declined since 2007 and 2011
Since Canadian produces a host of raw materials, energy, and agricultural products, the value of the Canadian dollar versus the US dollar tends to be a function of commodity prices. The Canadian currency has a high correlation with the price of crude oil and energy commodities because over one-fifth of its exports come from that sector.
Source: CQG
As the quarterly chart highlights, the range in the C$ versus the US$ currency pair since 2001 has been from $0.6170 to $1.1043. The midpoint of the range is $0.86065. At below the $0.75 level, the Canadian dollar has been weak and is well below the middle of its trading band over the past two decades.
The C$ hit its high in 2007 when the price of crude oil was on its way to the all-time high in 2008. In 2011, as commodity prices rose to highs, the C$ made a slightly lower peak at over $1.06 against the US dollar. Meanwhile, in late 2015 and early 2016, commodity prices fell to multiyear lows taking the C$ to a bottom of $0.6809. The Canadian currency measured against the US dollar displays a high correlation to commodity and crude oil prices since the turn of this century.
Near the bottom end of the trading range, but trending higher
The Canadian versus the US dollar currency pair is below its midpoint but has been making some slight upside progress since the 2016 low.
Source: CQG
As the monthly chart illustrates, the currency relationship has made marginally higher lows over the past four years. The low in the currency in early 2016 came as the price of crude oil fell to a bottom of $26.05 per barrel in February 2016. After dropping to a bottom of $0.68090 in 2016, the next bottom came in May 2017 at $0.72535 at a time when the price of oil was on its way to a high low of $42.05 on the nearby NYMEX contract. In December 2018, the C$ versus US$ currency pair made another higher low as the price of oil also made a marginally higher bottom at $43.26 per barrel.
The latest higher low at $0.7427 came at the end of last month as crude oil reached another higher bottom of $43.32 per barrel.
The bottom line is that the Canadian dollar is a proxy for the price of oil as the energy commodity accounts for 22% of the export revenue flow into the nation.
Book value in the U.S. neighbor to the north
Crude oil is not the only commodity that Canada extracts from the crust of the earth. The nation exports metals and ores, and a host of agricultural products grow in its fertile soil. Wheat, barley, and oats are the nation's leading grain exports. Canola, soybeans, and flaxseed are the oilseed exports from the country.
Canada produces more raw materials, energy, and food than it can consume, making the nation a supermarket for importing countries. The Canadian dollar is a fiat currency that derives value from the full faith and credit of the Canadian government, which issues the legal tender. However, Canada's overall commodity balance sheet provides compelling support for the value of its currency. The country that produces staple goods required around the world makes the Canadian dollar a proxy for commodities and gives underlying value to the loonie.
FXC moves higher and lower with the C$ versus US$ currency pair
Since the Canadian dollar tends to move higher and lower with oil and other commodity prices, the Canadian currency is a proxy for the raw material asset class. The most direct route for a risk position in the Canadian dollar versus the US dollar currency pair is via the over-the-counter foreign exchange or futures markets. The
Invesco Currency Shares Canadian Dollar Trust is a product that makes the currency relationship available for market participants that do not venture into the OTC or futures arena. The fund summary for FXC states:
The investment seeks to track the price of the Canadian Dollar, net of trust expenses. The fund seeks to reflect the price of the Canadian Dollar. The sponsor believes that, for many investors, the shares represent a cost-effective investment relative to traditional means of investing in the foreign exchange market.
Source: Yahoo Finance
FXC has net assets of $117.67 million, trades an average of 27,947 shares each day, and charges a 0.40% expense ratio. A rally in the currency pair took it from $0.75015 on February 10 to $0.7575 on February 21, a rise of 0.98%.
Source: Barchart
Over the same period, FXC rose from $74.03 to $74.74 per share or 0.96%. The product does an excellent job tracking the price action in the Canadian versus the US dollar currency pair.
The Canadian dollar is a proxy for commodity prices, but it acts as a product with a weighting towards the price of crude oil. The C$ is a candidate for those looking for a bounce in the price of the energy commodity over the coming days and weeks.
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This article was written by
Andrew Hecht is a 35-year Wall Street veteran covering commodities and precious metals.
He runs the investing group The Hecht Commodity Report, one of the most comprehensive commodities services available. It covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders. Learn more.Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.
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