Canada Stocks, Dollar Break From Oil to Outperform Global Peers

  • S&P/TSX, loonie outperforming developed market peers this year
  • Crude will climb modestly to $37 a barrel: BMO's Porter

Canadian equities and the currency are outperforming global peers, breaking away from their lock-step relationship to crude oil.

The Standard & Poor’s/TSX Composite Index, Canada’s benchmark equity gauge, is among the best-performing developed markets this year, battling New Zealand for the top spot and about 0.2 percent away from erasing 2016 losses. Raw-materials producers are leading Canadian stocks higher, rallying 13 percent as a group.

Meanwhile the Canadian dollar, known as the loonie for the iconic waterfowl on the C$1 coin, is one of the best-performing major currencies in the world, up about 3 percent this year against the dollar and behind only the Japanese yen.

‘More Exaggerated’

“It’s not a total divergence, more of an amplitude,” said Doug Porter, chief economist at Bank of Montreal, in a phone interview. “The currency has had more exaggerated moves than crude has, and its rebound is certainly far beyond the rebound we’ve seen in crude this year. You can argue the currency was overdone with the selling in January so its reaction in December and January was overdone.

Crude closed at a two-month high March 1, however prices remain down about 7 percent this year and have averaged less than $32 a barrel during the past two months. WTI for April delivery rose 65 cents to $34.40 a barrel on the New York Mercantile Exchange. It was the highest settlement since Jan. 5.

Porter expects crude to end the year only slightly higher from current levels, to about $37 a barrel as there remains an imbalance between supply and demand. Equity and currency markets on the other hand have turned a corner after both slumped to multi-year lows on Jan. 20, he said. That was the day Bank of Canada Governor Stephen Poloz decided to keep benchmark interest rates at 0.5 percent, instead of cutting, as many economists had expected.

“You could make a case both, especially the currency, were pushed a bit far given the underlying economic reality,” Porter said. “It’s interesting both equities and the currency bottomed on the exact same day.”

There may be a further split between stocks and the loonie later this year if the Bank of Canada lowers rates further, a “very real” possibility if growth remains close to 1 percent and the Canadian dollar continues its upward trajectory, Porter said.

The impact of the weaker Canadian dollar on imports, a key part of the surprise fourth-quarter growth in Canada’s economy, shows effects of the currency on the country will be gradual, he said.

“The currency has slow, deep effects on the economy,” Porter said. “Still lots of room to run on that front.”

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