The Canadian Dollar Resists the U.S. Dollar’s Advance

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:

1. 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.
2. 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.
3. 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!

Full disclosure: no positions