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Cheer up, snowbirds – loonie set to strengthen Add to ...

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Canada’s trade data, along with the recent performance of materials stocks, suggest the loonie is overdue for a bounce against the U.S. dollar.

The Canadian dollar is considered a “hard currency” by global investors because of the country’s enviable resource wealth. As a result, the value of the loonie often moves along with returns on the S&P/TSX Materials index.

CAD/USD vs S&P/TSX Materials index

SOURCE: Scott Barlow/Bloomberg

The Citi Commodity Terms of Trade Index, which measures the prices of goods the country exports most, tells a similar story. The relative stability in oil prices has kept the value of exports from steep declines while the loonie fell. Again, on this basis the Canadian dollar appears undervalued.

CAD/USD vs Citi Commodity Terms of Trade index for Canada

SOURCE: Scott Barlow/Bloomberg

In addition, new orders from Canadian manufacturers showed remarkable strength in the fourth quarter of 2013. If this reflects export growth resulting from the correction in the currency, then it will provide more support for loonie in the months ahead.

The stomach-churning fall in Chinese commodity prices over the past week has thrown a wrench into the works. Sovereignists won’t help either. But unless the news gets worse, it seems likely that the Canadian dollar will at least stabilize, and possibly even recover some lost ground, in the coming months.

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