Skip to main content
The Globe and Mail
Support Quality Journalism.
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
Just$1.99
per week
for first 24 weeks

Enjoy unlimited digital access
Cancel Anytime
Enjoy Unlimited Digital Access
Get full access to globeandmail.com
Just $1.99per week for the first 24weeks
Just $1.99per week for the first 24weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); } //

Canadian dollar coins are pictured in Vancouver, Sept. 22, 2011.

JONATHAN HAYWARD/The Canadian Press

The Canadian dollar jumped almost a full cent against the greenback last Wednesday after the Bank of Canada announced a surprisingly hawkish monetary outlook.

The move, however, could prove deceiving. Reaction in the currency market to central bank policy has been increasingly hard to detect over the past few years. Instead, the Canadian dollar has become a global reflation trade – tracking the copper price far more closely than fixed income markets or even crude.

And given the copper price this week is retesting record highs of above US$10,000 a tonne (about US$4.50 a pound) last seen a decade ago, the Canadian dollar seems well supported at current levels.

Story continues below advertisement

Changes in the loonie price were easily intelligible in the wake of the financial crisis. From 2009 to mid-2018, the currency’s value followed relative bond yields – the difference between the yield on the two-year government of Canada bond and the equivalent U.S Treasury yield – almost exactly.

This time, I haven’t even included a chart comparing relative yields and the Canadian dollar. Over the past three years, the correlation between them has turned negative. More often than not, the loonie has moved in the opposite direction of yield spreads. The premise – that foreign investment would gravitate to Canadian bonds when looser central bank policy allowed for higher Canadian yields relative to Treasuries, creating demand for Canadian dollars – no longer works well.

The petro-loonie thesis that the Canadian dollar will track the crude price has held up better than relative yields in explaining changes in the currency value, particularly over the past 12 months. Where commodity prices are concerned, however, copper has provided the best indicator for the direction of the loonie in recent years.

The first two accompanying charts compare the path of the Canadian dollar to the oil price and the copper price, respectively (I used the West Texas Intermediate crude price because it had a slightly higher correlation with the currency than Western Canadian Select crude).

CAD/USD

WTI crude (US$/bbl, right scale)

$0.83

$90

0.81

80

0.79

70

0.77

60

0.75

50

0.73

40

0.71

30

0.69

20

0.67

10

0.65

0

2019

2020

2021

THE GLOBE AND MAIL, SOURCE:

BLOOMBERG; SCOTT BARLOW

CAD/USD

WTI crude (US$/bbl, right scale)

$0.83

$90

0.81

80

0.79

70

0.77

60

0.75

50

0.73

40

0.71

30

0.69

20

0.67

10

0.65

0

2019

2020

2021

THE GLOBE AND MAIL, SOURCE:

BLOOMBERG; SCOTT BARLOW

CAD/USD

WTI crude (US$/bbl, right scale)

$0.83

$90

0.81

80

0.79

70

0.77

60

0.75

50

0.73

40

0.71

30

0.69

20

0.67

10

0.65

0

2019

2020

2021

THE GLOBE AND MAIL, SOURCE: BLOOMBERG; SCOTT BARLOW

The crude price’s brief but remarkable descent into negative territory a year ago was certainly not helpful in maintaining the correlation with the loonie. Even afterward, however, it appears the domestic currency has led the oil price rather than the reverse. This makes crude an unreliable indicator for moves in the Canadian dollar.

The second chart highlights copper’s role as a far more trustworthy signal for the loonie’s direction. Looks aren’t deceiving – correlation calculations find that copper (three-month future price) has tracked the dollar price 20 per cent more closely than oil over the past three years.

CAD/USD

3M copper (US$/lb, right scale)

$0.83

$5.00

4.50

0.81

4.00

0.79

3.50

0.77

3.00

0.75

2.50

0.73

2.00

0.71

1.50

0.69

1.00

0.67

0.50

0.65

0

2021

2019

2020

THE GLOBE AND MAIL, SOURCE:

BLOOMBERG; SCOTT BARLOW

CAD/USD

3M copper (US$/lb, right scale)

$0.83

$5.00

4.50

0.81

4.00

0.79

3.50

0.77

3.00

0.75

2.50

0.73

2.00

0.71

1.50

0.69

1.00

0.67

0.50

0.65

0

2021

2019

2020

THE GLOBE AND MAIL, SOURCE:

BLOOMBERG; SCOTT BARLOW

CAD/USD

3M copper (US$/lb, right scale)

$0.83

$5.00

4.50

0.81

4.00

0.79

3.50

0.77

3.00

0.75

2.50

0.73

2.00

0.71

1.50

0.69

1.00

0.67

0.50

0.65

0

2021

2019

2020

THE GLOBE AND MAIL, SOURCE: BLOOMBERG; SCOTT BARLOW

If copper provides the asset price most pertinent to investors following the loonie, the Citi Terms of Trade Index for Canada provides the most important economic barometer. The index reflects a weighted average of the price of goods that cross the Canadian-U.S. border.

Story continues below advertisement

The terms of trade index is heavily influenced by energy, automotive, machinery and metals prices and provides a proxy for currency demand to facilitate cross-border trade. Higher prices for goods exported from Canada to the United States, for instance, means that American buyers have to exchange more greenbacks for Canadian dollars, helping push the loonie higher in currency markets.

Our third chart shows that the terms of trade index has been an effective indicator for the Canadian dollar. The correlation math points to terms of trade as equally effective as the copper price in tracking the loonie.

CAD/USD

Citi Terms of Trade Index

Canada (right scale)

20

$0.81

15

0.79

10

0.77

5

0.75

0

0.73

-5

0.71

-10

0.69

0.67

-15

2019

2020

2021

THE GLOBE AND MAIL, SOURCE:

BLOOMBERG; SCOTT BARLOW

THE GLOBE AND MAIL, SOURCE:

BLOOMBERG; SCOTT BARLOW

CAD/USD

Citi Terms of Trade Index

Canada (right scale)

20

$0.81

15

0.79

10

0.77

5

0.75

0

0.73

-5

0.71

-10

0.69

0.67

-15

2019

2020

2021

THE GLOBE AND MAIL, SOURCE:

BLOOMBERG; SCOTT BARLOW

CAD/USD

Citi Terms of Trade Index Canada (right scale)

20

$0.81

15

0.79

10

0.77

5

0.75

0

0.73

-5

0.71

-10

0.69

0.67

-15

2019

2020

2021

THE GLOBE AND MAIL, SOURCE: BLOOMBERG; SCOTT BARLOW

Changes in monetary policy by the Bank of Canada will always affect the Canadian dollar, as we learned last week. Governor Tiff Macklem’s recognition that the recovery was proceeding faster than previously forecast and that monetary stimulus could be throttled back as soon as next year sent both Canadian bond yields and the currency higher.

Importantly, however, recent history indicates that the global economic recovery that is driving copper prices higher, and making Canada’s trade-heavy, economically sensitive economy more attractive, has had a more consistent influence on the loonie. For good or bad, I expect that global economic data, and not monetary policy, will remain the primary determinant of the loonie’s path.

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow the author of this article:

Follow topics related to this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies