BMO chief economist Doug Porter highlighted the Canadian dollar’s lack of sensitivity to rising oil prices in a research report this week, providing further evidence of a potential end of the petroloonie phenomenon. In truth, however, the domestic currency is not tracking any of its historic drivers.
Mr. Porter noted that in the past, a US$10 move in the West Texas Intermediate (WTI) crude price would push the value of the loonie higher by three cents. Yet since mid-June 2021, WTI is up almost 20 per cent while the Canadian dollar is down 10 per cent.
BMO cites two reasons for the new disconnect. One, the U.S. has turned itself into a major oil producer thanks to shale operations and buys less foreign crude. Two, Canadian producers struggle to get their oil to global markets, which means foreign commodity prices do not have the same effect.
The lack of correlation between crude and the loonie is not unprecedented. From 2010 to 2018, for instance, relative bond yields – the difference between the yield on the Canadian two-year bond minus the two-year U.S. Treasury yield – tracked the dollar’s value far better than crude. There have also been times, although not recently, when copper prices are more connected to the loonie more than oil.
Neither oil prices, copper prices nor yield spreads are providing anything like an accurate indicator of the Canadian dollar’s value in the current market.
Mechanically, the loonie’s value climbs along with international demand for domestic assets. Foreign money is sold in currency markets to buy the Canadian dollars necessary to make the transactions. Oil and bonds with significantly higher yields than U.S. equivalents are two common reasons for the currency exchanges that create bids for the loonie and pushes its value higher.
Right now, U.S. equity markets and the U.S. economy are leading the developed world. The global rush towards the Magnificent Seven and the S&P 500 more broadly is, if anything, motivating Canadian investors to sell loonies to buy greenbacks and American assets.
Until things change and economically sensitive sectors begin to outperform technology stocks – the recent strength in oil prices may be a sign this change in leadership is underway – the Canadian dollar is likely to remain weaker than traditional indicators imply.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
General Electric (GE-N) Now that the U.S. industrial giant has completed its US$191.9-billion breakup, bullish investors are betting it will defy the lacklustre share price performance that has followed many corporate spinoffs over the last few decades. David Randall of Reuters reports.
VitalHub Corp. (VHI-T) Shares of this Canadian health-care stock jumped 54 per cent last year, and returns accelerated in 2024 with the share price rallying nearly 48 per cent in the first quarter. The Street believes further gains are in store: the stock has six unanimous buy recommendations and an average target price of $7.54. Jennifer Dowty spoke with the CEO to find out more about the company and its plans.
The Rundown
Has the yield curve been wrong about a recession? Don’t count on it yet
Many pundits are abandoning the inverted yield curve as an indicator that a recession will soon get underway. That’s too bad, says veteran fund manager Tom Czitron, because there’s still plenty of reason to believe an economic contraction is on its way shortly.
Also see: U.S. bond manager PIMCO sees Fed rate cuts midyear, but gradual easing
Stock market crashes are rare, equity bubbles even rarer
One reason people continually compare the tech-led U.S. stock market boom of the moment to the disastrous dot-com implosion in 2000 is that the latter is really the only true U.S. equity market bubble and bust of the post-World War Two period, says Reuters’ Jamie McGeever. And many experts are doubtful the current tech boom is history repeating itself.
Trump-and-dump: Speculators bet on Truth Social ‘meme’ stock
Reuters interviews with more than a dozen investors that posted about their positions on social media platforms such as Reddit and X found that most were looking to score a quick profit with Trump Media and Technology Group (DJT-Q). They bet that Trump supporters’ fascination with the stock was untethering TMTG’s stock price from the company’s business fundamentals. It’s been a bumpy ride so far.
Traditional pre-election rally eludes Indian stocks
With weeks to go before India starts voting in a general election that the incumbent government is widely expected to win, Indian equity markets are uncharacteristically languid and not seeing the traditional pre-election rally. Reuters reports that analysts say this time is different, pointing to a stellar rally in the past year, rich valuations and uncertainties around political issues such as corruption and electoral funding as factors giving investors reason to pause.
Ether fettered by fate of spot ETF proposals
Cryptocurrency ether is struggling to keep pace with soaring big brother bitcoin. The no. 2 cryptocurrency, which commands less than a fifth of the $2.7 trillion crypto market, has not done poorly. But ether is up just around 53% in the first three months of this year, compared with bitcoin’s 65%. That’s despite the possibility that ether ETFs could be on their way. Reuters looks into what’s going on.
Others (for subscribers)
Gordon Pape: Stable interest rates have boosted my High-Yield Portfolio beyond expectations, rising over 8% annually
Number Cruncher: 13 S&P 500 stocks poised to blossom heading into spring
Number Cruncher: Attractive REITs in a falling interest rate environment
Wednesday’s analyst upgrades and downgrades
Tuesday’s analyst upgrades and downgrades
ROB Magazine
Smart Money: Mackenzie Investments’ Dongwei Ye on why she is upbeat on small-cap stocks this year
Globe Advisor
With interest rate cuts expected, ‘boring’ infrastructure is looking more interesting
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Ask Globe Investor
Question: I have a good portion of my portfolio in U.S. dollars. I would like to invest in an ETF that is focused on Canadian banks/financials that is in USD. I do not want to convert USD to Canadian dollars currently. Are there any ETFs that you would recommend? – Frank S.
Answer: Take a look at the BMO Canadian Banks Covered Call Canadian Banks ETF (US dollar units). The trading symbol is ZWB.U on the TSX.
This ETF holds an equal-weighted portfolio of the Big Six Canadian banks, and the mangers write covered call options to boost income. The performance history isn’t impressive but keep in mind the U.S. dollar units were only launched in January 2022. That was hardly an auspicious time, with rising interest rates and recession fears battering the banking sector. As a result, the units show an average annual compound rate of return of negative 6.57 per cent since inception (to Feb. 29). The Canadian dollar version of this fund (ZWB-T) has been around since 2011 and shows an average annual gain since inception of 7.72 per cent.
I think banking stocks will make a strong recovery as recession fears recede and interest rates begin to decline later this year.
The fund currently pays a monthly distribution of 14 US cents per unit for a yield of 7.2 per cent. The MER is high, at 0.72 per cent.
A Google search will reveal other options if you want to make comparisons.
--Gordon Pape (Send questions to gordonpape@hotmail.com and write Globe Question on the subject line.)
What’s up in the days ahead
Philip MacKellar of The Contra Guys argues the investment case for Pan American Silver.
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Compiled by Globe Investor Staff