Friday, September 21, 2007

Canadian dollar commodity bandwagon not perfect



With the Canadian dollar reaching parity with the US dollar for the first time in over 30 years, there has been an increase in the number of stories about the high correlation between commodity prices and the currency increase. There is no denying the link between oil, gold and the currency, but this relationship does go through cycles.


The figure shows the 30-week correlation between these three markets. The evidence clearly points to a positive relationship but there are periods of these markets having no relationship or moving in opposite directions. The strength of the Canadian dollar is more than just a short-term commodity play, so anyone trying to track the Canadian dollar with the movement in oil or gold will have to occasionally suffer disappointment.

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