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Is the loonie having a Wile E. Coyote moment?

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Market action in the materials sector suggests that the Canadian dollar is still defying gravity and is set for further weakness.

The loonie's dependence on commodity prices is clearly reflected in the close relationship between the S&P/TSX Materials index and the value of the Canadian dollar relative to the greenback.

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The last time we checked in on the connection between the two, materials stocks effectively predicted a fall in the domestic currency. (see chart).

To date, however, the Canadian dollar has not fallen far enough to reflect the weakness in commodities stocks. This suggests that either a sharp decline in the loonie, or a significant rally in the materials sector, is on the immediate horizon.

I'm not comfortable guessing which one of this will occur. For the mid term, I'm generally bullish on U.S. dollar assets and bearish on China and the commodity complex. But recent noises out of Beijing imply that the Chinese government will once again resume building things they don't need to maintain economic growth levels and this will increase demand and prices for for commodities.

I am, however, comfortable that one of the two things – Canadian dollar weakening or material stocks strengthening – will occur.

Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights , and follow Scott on Twitter at @SBarlow_ROB .

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About the Author
Market Strategist

Scott Barlow is The Globe's in-house market strategist. He is a 20-year veteran of Canadian investment banks, including Merrill Lynch Canada, CIBC Wood Gundy and Macquarie Private Wealth (MPW). He was a highly ranked mutual fund analyst for 10 years and then, most recently, the head of a financial adviser support team at MPW. More

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