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‘Canada IS Commodities’.

Last Thursday, August 18th, CFA Vancouver hosted a Bloomberg sponsored presentation by the Bank of Canada. Bloomberg presented some of their very impressive online analytic tools in addressing three areas of interest to all investors – Currencies, Commodities and Bonds.

Yesterday, Currencies. Today, Commodities.

Bloomberg was brief and straight forward – Canada ‘is’ commodities. And as commodities go, so goes the demand for the Canadian dollar. The Bank of Canada thinks so too as it’s philosophy says commodities are the key drivers of the Canadian currency. As the chart below indicates, there is a close of a correlation between the two.

What do Bloomberg’s Commodities tools say about commodities?

Briefly, like the Loonie (see yesterdays post), the backdrop is bearish.

Why? Here are a few snippets of rationale.

The most important indicator is that the trends from China and Emerging Markets in general are not good.

Fifty percent of demand for new vehicles comes from China. (Versus about ten percent from the U.S.). (A new vehicle has roughly fifty pounds of copper in each unit).

Chinese construction activity is down by thirty percent year-over-year.

Sixty percent of world demand for commodities comes from Emerging Markets.

Emerging Markets are experiencing very strong inflation. Inflation kills growth.

Based on the Bloomberg commodity analysis tools, commodities demand while still significant is slowing. This will impact the Canadian dollar.

What might this mean for Investors?

Again, if Bloomberg is right, the Loonie is overvalued. It has more purchasing power today than it is expected to have in the near future. So investors ought to diversify away from the Loonie while it is inflated.

Next time?
Bloomberg on Bonds.
Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan

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