Commodity currency

Analysts say the massive appreciation in the Canadian dollar can in large part be attributed to the bullish cycle in commodities. Canada, a large commodity producer and exporter, has benefited from the bull runs in the energy, lumber, and metals markets over the past several years.

“The Bank of Canada’s commodity index is up 25.7 percent from last year,” says David Powell, currency analyst at Ideaglobal.

The BOC has comprised a weighted index of the commodities that Canada produces. The weights of some key components are as follows: crude oil 21.40, lumber 13.58, and natural gas 10.69. Details on that index can be found at: www.bankofcanada.ca/en/rates/commod2.html.

A sharp rise in demand for energy products in recent years has helped to bolster the Canadian economy and currency. Charmaine Buskas, foreign exchange economist at Economy.com, notes the Canadian energy export market is actually skewed more toward natural gas than crude oil.

Natural gas comprises 6 percent of the total Canadian export basket, she says, vs. 5.6 percent of crude exports. Nonetheless, sharp rallies in both those energy products have benefited the Canadian dollar.

“Canadian natural gas exports comprised 16 percent of U.S. natural gas consumption in 2004,” Buskas says. She adds that Canada exports more than one million barrels per day of crude oil to the U.S. “Canada is a small, but important energy exporter, given its proximity to the U.S.,” she says.