Market Overview

Canadian Currency Slips As Dollar Gains Traction

Canadian Currency Slips As Dollar Gains Traction

The Canadian dollar has come under scrutiny recently since its lacklustre performance against the greenback. This follows an unimpressive report detailing the Canadian labour force participation rate, but all is not lost for the Canadian dollar. Surprisingly, the TSE (Toronto Stock Exchange) ranks among the best performing stock markets of the year. This news is certainly surprising given the poor jobs numbers and lower than expected exports from Canada. However, the fundamentals of the Canadian stock exchange are sound and the S&P/TSX composite index has outshone every single major stock exchange in 2014.

Strong Performance in Q1 of 2014 for the TSX

In fact, The Toronto Stock Exchange has recorded gains of 7.69% since January 1, 2014. This is far superior to the anaemic growth of the Dow Jones Industrial Average which recorded an 0.86% growth for 2014 to date. Canada's stock market is even more impressive when compared to the NASDAQ index which is 2% lower in 2014. Of course, the TSX has not surpassed all major international bourses, and many smaller stock exchanges have performed even better. These include 16% growth for Denmark's OMX, and a 15% growth rate for Pakistan's KSE 100.

This news comes as somewhat of a surprise to those following Canada's fortunes in the world. Recently, commodity prices had a devastating impact on the performance of the Toronto Stock Exchange. The turnaround came when energy stocks rebounded and since oil and gas price indexes increased by around 25% between 2013 and 2014, the TSX moved accordingly. But another factor that has weighed heavily on the performance of the Canadian bourse is the strength of the Canadian dollar – the loonie.

The CAD/USD and Economic Policy Decisions and Announcements

Analysts indicate that every percentage point decline in the Canadian dollar results in a half a percentage point increase on the Toronto Stock Exchange. This is easily verified by considering that a cheaper Canadian dollar makes Canadian exports far more attractive to foreigners. This has the effect of boosting the country's stock market. Allied with this fact is the US Federal Reserve's decision to taper quantitative easing – to the tune of $10 billion monthly. The advantage that US equities enjoyed is now being removed and Canadian stocks are able to regain their balance vis-à-vis US stocks. Since the announcement on March 19, the CAD strengthened by 3.4% against the USD.

Canadais AAA Rated

In terms of cross currency exchange rates, the loonie dropped to 91.77 cents in US dollars as a result of the poorer than expected April employment data. The US economy is expected to rebound during Q2 of 2014 at to the tune of 3.8%. This follows a period of contraction in Q1. In terms of commodities, gold bullion for June delivery was up by $8.2 to $1295.80 an ounce, copper for June delivery was up $0.07 in trading at $3.15 a pound, and crude oil for June delivery was up to $0.60 at $100.59 per barrel. These factors have all helped the Toronto Stock Exchange perform strongly in 2014. Canada remains one of the most highly rated countries by all of the world's credit rating agencies including Moody's, Fitch, and Standard & Poor's. The aforementioned credit rating agencies consider Canada to be a stable country with an AAA rating.


By David Parker,

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.


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