Gold is becoming the “dominant driver” of the Canadian dollar against the greenback, say economists. (Credit: Getty Images/Bloomberg)
Once upon a time, the Canadian dollar was known as a petrocurrency, because of the sway oil prices held over this economy and its currency.
But those days are gone, and now economists say there’s a new force in town.
National Bank of Canada economists Stéfane Marion and Kyle Dahms say that something unusual happened last Friday when Statistics Canada released its gross domestic product (GDP) data.
Despite a deeper than expected GDP contraction, a widening of the negative United States-Canada two-year spreads and drop in oil prices, the Canadian dollar still managed to end the day stronger against its U.S. counterpart.
“How did the CAD absorb all these negative shocks without losing ground to the USD?,” they said. “The answer lies in bullion.”
Gold — on a tear recently as bets on U.S. Federal Reserve rate cuts rise and traders seek safety from the sell-off in equity and bond markets — rose almost one per cent on Friday, more than offsetting the headwinds from rates and oil, Marion and Dahms said.
With bullion prices soaring, Canada’s trade surplus in gold has hit an “unprecedented” $44 billion, up from $30 billion a year ago, becoming the “dominant driver” of the loonie against the U.S. dollar, the economists said.
At the same time, interest-rate differentials in two-year yields and oil prices are showing little to no correlation.
“There is no historical precedent for gold exerting such influence over the currency, eclipsing both oil and rates as the primary force behind CAD moves,” the economists said.
Truth is, the loonie hasn’t been a petrocurrency for a while.
Oil prices started losing their sway over the currency as early as 2016, Charles St-Arnaud, chief economist at Alberta Central, said in an earlier report.
The reason is that a smaller share of oil revenues was being invested back into operations and a greater share was being returned to shareholders, most of them foreigners, he said.
“In recent years, we have witnessed a decoupling between oil prices and the exchange rate versus the USD,” he said.
Gold as a driver may have staying power.
The yellow metal has gained 30 per cent this year, making it one of the best-selling commodities, according to Bloomberg. Both gold and silver have more than doubled over the past three years as rising geopolitical and economic risks sent investors running for shelter.
This week it surpassed its previous record high in April of US$3,500.05 and was trading at US$3,602.30 this morning.
And the loonie wasn’t the only thing that got a boost from gold last Friday. Canada’s main stock index, the S&P/TSX composite, hit a record high before the long weekend, propelled by gold mining shares that gained 2.7 per cent.
“Gold and silver stocks are keeping us afloat despite weak GDP numbers today,” Alfred Lee, deputy chief investment officer at Toronto-based Q Wealth Partners, told Reuters on Friday.
Analysts say the gold sector has been the largest contributor in helping the TSX outperform the S&P 500 this year.
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Capital Economics
What will the global geopolitical map look like when U.S. President Donald Trump finishes his term in four years?
Today’s chart by Capital Economics shows the alignment of countries towards the United States or China just as Trump returned to office. The blocs are not defined by formal agreements, but represent patterns of trade, flows of investment and diplomatic ties.
Some thought Trump’s aggressive tariff policies would push traditional allies closer to China, but so far that hasn’t happened, said Capital.
Instead, most have acquiesced to trade deals with the U.S. that often include pledges to restrict trade and investment with China.
“In sum, while Trump’s return has ushered in a more transactional approach to U.S. foreign policy and caused diplomatic ruptures with some countries (most notably India and Brazil), it has not fundamentally redrawn the geopolitical map,” said the economists.
“There remains a clear divide between the West, led still by the U.S., on one side, and China (and Russia) on the other.”
Today’s Data: Canada labour productivity, Vancouver home sales data, United States factory and durable goods orders
Earnings: Dollar Tree Inc, The Campbell’s Company, Salesforce Ince, Hewlett Packard Enterprise Co.
Three powerful forces, each with the potential to destabilize U.S. and possibly global financial markets and reshape the investment landscape, are converging. It’s clear that we may be entering a new era of risk, writes investing pro Martin Pelletier, and investors must adapt. Read on for why he believes real assets, inflation hedges and global diversification aren’t just tactical plays, they’re strategic imperatives. Find out more
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Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.
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