Can U.S. stocks rise along side the dollar? If the past three months are any indication, the answer is “yes.” Over that time, the SPDR S&P 500 (NYSEArca: SPY) is up more than 6% while the PowerShares DB Dollar Bullish (NYSEArca: UUP), the U.S. Dollar Index tracking ETF, is up about 2%.
Good news for U.S. stocks, but bad news for our northern neighbor, Canada. While the greenback and U.S. stocks have been rising, the loonie and Canadian equities have been falling in near perfect unison. Over the past 90 days, the CurrencyShares Canadian Dollar Trust (NYSEArca: FXC) and the iShares MSCI Canada ETF (NYSEArca: EWC) are down 3.6% and 3.5%, respectively. [Canadian Dollar ETF Weakens on Fed Plans]
The loonie has been hampered by speculation of the Federal Reserve scaling back stimulus measures that has bolstered the greenback. While the U.S. and China remain loyal buyers of Canadian crude, the shale boom in the former and slowing economic growth in the latter are among the catalysts that have contributed to a decrease in Canadian oil exports. EWC allocates almost 26.5% of its weight to the energy sector. [Canada ETF: Developed Market Commodity Exposure]
It is not just oil that has played a part in the decline of Canadian equities and its dollar. The country is a major producer of of zinc, nickel, potash, gold, copper and lead and the country is a leading exporter of forest products. Commodities are denominated in U.S. dollars, meaning they often have an inverse relationship to the U.S. currency. Swooning commodities prices have chased investors from Canada despite the country’s AAA credit rating, something the U.S. does not possess.
Repudiation of the commodities trade has prompted speculation that Canada could be stung by a housing bubble, a scenario that could prove problematic for the country’s banking sector. “Canadian banks are well positioned to absorb credit losses arising from a housing downturn in the country, say analysts, but a collapse could have knock-on effects that will dampen future earnings growth and potentially have negative long-term implications,” reports David Pett for the Financial Post.
EWC allocates 36.7% of its weight to the financial services sector and four of Canada’s six largest banks are found among the ETF’s top-10 holdings. The fund’s top-three holdings, all banks, represent nearly 19% of its weight.