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Canadian Dollar A Marginal Gain Against the U.S. Dollar in Early 2023

Barchart - Sun Feb 5, 12:04PM CST
Dollars and Wallets - shutterstock_360575693

Canada is the world’s second-largest country by area. The ten Canadian provinces and three territories stretch east to west from the Atlantic to the Pacific Ocean and north to the Arctic Ocean. While Canada is a vast country territorially, it has only the world’s thirty-ninth leading population, behind Poland and ahead of Morocco. 

Canada is rich in natural resources and borders the world’s wealthiest country with the highest GDP, the United States of America. The U.S. is, by far, Canada’s leading export partner. 

Rising commodity prices tend to be bullish for Canada’s currency as they increase revenues and tax receipts. The Invesco Currency Shares Canadian Dollar Trust (FXC) moves higher and lower with the Canadian dollar’s value against the U.S. dollar. 

Canada produces many raw materials

Canada is a leading crude oil, gold, wheat, aluminum, and timber-producing country, and Canada is the world’s fifth-leading petroleum and gold producer. Canada is sixth in global wheat output and fourth in aluminum production, and Canada’s lumber exports are second only to China. 

Canada’s small population makes it a significant raw materials exporter, with the neighboring U.S. as its leading trading partner.  

Exports are critical for revenues and the C$’s value

Commodity exports are crucial for tax and other government revenues, and higher commodity prices tend to support the Canadian dollar’s value. In 2011, the rally that took raw material prices to multi-year or record highs pushed the Canadian dollar over parity against the U.S. dollar. 

The chart shows the C$ peaked against the U.S. dollar at the $1.06164 level in July 2011. When raw material prices fell to lows in early 2016, the C$ dropped to $0.68081, and the 2020 global pandemic pushed it to a slightly higher low of $0.6817 in March 2020. 

The unprecedented levels of central bank liquidity and government stimulus to stabilize markets caused commodity prices to rise, but domestic issues in Canada and the increase in the U.S. dollar’s value to the highest level in two decades prevented the C$ from appreciating anywhere near the 2011 high.  

The C$ is a component of the U.S. dollar index

In September 2022, the U.S. dollar index, which measures the U.S. currency against other world reserve foreign exchange instruments, rose to the highest level in two decades, since 2002. The Canadian dollar is a component of the U.S. dollar index:

Source: ICE

The chart highlights the U.S. dollar index has a 9.1% exposure to the Canadian dollar. The rise of the dollar index was a function of the fall of the euro currency, with a 57.6% exposure to the dollar index. The euro fell because Russia invaded Ukraine, with the conflict on Western Europe’s doorstep. However, rising U.S. interest rates in 2022 made the U.S. currency more attractive to other reserve currencies, including the Canadian dollar. 

Higher lows against the U.S. dollar since 2016- A bullish start to 2023

The Canadian dollar has made higher lows against the U.S. dollar since the early 2016 low. The long-term chart shows a marginally higher low in March 2020 compared to the January 2016 bottom. In October 2022, the C$ reached a higher low of $0.7155.

The three-year chart illustrates the higher low in October 2022. Since then, the C$ has made higher lows and higher highs against the U.S. currency, with the bullish trend continuing in early 2023. 

FXC is the ETF that moves higher and lower with the C$ versus the U.S. dollar exchange rate

The most direct route for a risk position in the C$ versus the U.S. $ currency relationship is via the over-the-counter foreign exchange or futures markets. The Invesco Currency Shares Canadian Dollar Trust (FXC) provides an alternative for market participants looking to add risk to portfolios via an instrument that trades on the stock market on the NYSE Arca. 

At $72.94 on February 3, FXC had $99.2 million in assets under management. FXC trades an average of 37,185 shares daily and charges a 0.40% management fee. The currency relationship rose 5.38% from the mid-October 2022 low to the most recent high. 

Over the same period, FXC appreciated from $70.03 to $73.65 per share or 5.17% as FXC did an excellent job tracking the C$ versus U.S.$ foreign exchange relationship. While the over-the-counter foreign exchange market operates around the clock, FXC only trades during U.S. stock market hours, and FXC will not reflect highs or lows when the stock market is closed.

The trend is always your best friend in markets. Since the October higher low, the trend in the C$ is higher against the U.S. currency.   

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On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.