| Canadian dollar vs Gold |
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| Source: Reuters |
The Canadian dollar was the best-performing G10 currency in 2005. There are various reasons for this, including the fact that the currency has been used as a proxy for plays on certain commodities (see table).
However, as gold has risen against the US dollar by about 9% in 2006, the Canadian dollar has fallen against the greenback by about 3%. This suggests that the relationship between the precious metal and the currency has broken down, perhaps removing one of the major supports for the Canadian dollar’s strength.
Adam Cole, senior currency strategist at RBC, says that the initial weakness seen in the Canadian dollar this year is a result of short-term factors, such as some profit-taking and also some fears that the general election held on January 23 would lead to political uncertainty. He adds that another factor was an easing of natural gas prices. “Of all the commodities that correlate with the Canadian dollar, natural gas is the strongest. It came off the highs and that’s not seen as supportive for the Canadian dollar,” he says.