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Market history suggests Canadian pharmaceutical, technology, capital goods, auto and media sectors will be the biggest beneficiaries of the stronger U.S. dollar environment while materials, energy and consumer durables will fare the worst.
The chart above shows the correlation between the trade weighted U.S. dollar index (DXY) and all the major subindices of the S&P/TSX Composite Index using monthly data from 1990. (The usual warnings about correlation versus causation apply, as always).
Most of the results make subjective sense. The Pharma and Biotech Index is basically one stock, Valeant, which generates more than 50 per cent of its revenue from the United States. The technology index is a bit more problematic – the numbers are skewed by the technology bubble debacle in the late 1990s.
The capital goods sector is dominated by Bombardier, and SNC Lavalin so there's a lot of foreign currency revenue there also which boosts the bottom line. Autos benefitting from a stronger greenback is totally predictable – most of what is manufactured is sent south of the border.
With commodities traded in U.S. dollar terms, it is no surprise that energy and materials stocks have been under pressure when the DXY rises. Commodity prices fall as the dollar strengthens. Also, the U.S. economy is much less resource-intensive than the emerging markets, so when growth is focused in the U.S., global commodity demand growth tends to be subdued.
None of this is definitive, but investors should keep the effects of a strengthening U.S. dollar in mind when developing their investment strategies.
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 .