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Sometimes things just aren't that complicated. The Canadian dollar has traded in accordance with global spot commodity prices, and contrary to the rumblings, all signs indicate that it will continue to do so.
The concept of the "petro-loonie" has been debunked by numerous economists including Bank of Canada governor Mark Carney, but that doesn't mean that the value of the loonie has separated from commodity prices. This chart shows the 0.87 correlation between the Canadian dollar in U.S. dollar terms, and the S&P/Goldman Sachs Commodity Spot Price Index.
Granted, the correlation may not hold at these levels, and investors should be cautious about concluding that commodity prices cause changes in the currency. Right now, they're merely moving in the same direction.
But it's also easy to see why the connection exists. The higher commodity prices go, the more profit is generated by Canadian companies who can then hire more workers, who in turn can spend more and increase economic growth. The reverse is also true, as we have been finding out lately. To a significant extent, the attractiveness of Canadian assets for foreign investors – not just resource stocks but all companies – is either enhanced or diminished by commodity prices.
The trend also highlights Canada's extraordinary dependence on Chinese economic growth. China, as the main driver of commodity prices, is indirectly influencing the value of the Canadian dollar.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Scott on Twitter at @SBarlow_ROB.
Scott Barlow