The Canadian dollar, along with the related exchange traded fund, has lagged behind other developed market currencies this year, as the U.S. becomes more energy independent and winter demand for Canadian exports falters.
The CurrencyShares Canadian Dollar Trust (NYSEArca: FXC) is down 3.6% year-to-date, more than twice the loss suffered by the PowerShares DB US Dollar Index Bullish Fund (NYSEArca: UUP).
The Canadian currency has depreciated 4.2% against a basket of 10 developed country currencies this year – it is the worst performer of the group, reports Ari Altstedter for Bloomberg.
The loonie, named after the loon bird depicted on the Canadian dollar coin, has declined 3.1% against the U.S. dollar this year. The currency touched a four-year low of C$1.1279 on March 20 and currently trades around C$1.0959 per USD.
According to the Organization for Economic Co-operation & Development measure of purchasing-power parity, the Canadian dollar is still 11% overvalued relative to the USD.
Canada exports 75% of its goods to the U.S., but the crippling winter storms reduced demand.
“When the U.S. catches a cold, Canada gets the flu,” Camilla Sutton, the chief currency strategist at the Bank of Nova Scotia, said in the article.
Evan Brown, a currency strategist at Morgan Stanley, also argues that Canada’s energy sector, the largest export industry in the country, could see problems ahead. While the Keystone XL pipeline is stuck in limbo due to environmental concerns, Canada’s energy companies are facing increased competition from the U.S., namely from a shale oil boom. [Canadian Seen as a Vulnerable Developed Market Currency]
“Canada has to lean on something for growth and that something is going to be what they have relied upon” in the past, “which is commodity exports,” Brown said in the article. “If the oil-export receipts — the income from oil exports — is disappointing, that’s where you get the most bearish scenario for Canada.”
Brown warns that the loonie could depreciate to as low as C$1.3 per USD by next year if the pipeline problems remain unresolved, consumer demand dips and manufacturing falters.
CurrencyShares Canadian Dollar Trust
For more information on the loonie, visit our Canadian dollar category.
Max Chen contributed to this article.