Since the onset of the pandemic, the Canadian dollar has been more correlated to stocks than any other asset class. More specifically, it has had the highest correlation to broad market indices of US stocks like the S&P 500. That correlation has been higher than metrics like crude oil prices or yield spreads which traditionally have been highly correlated with the USD/CAD exchange rate. The correlation eased somewhat a few months ago when the first wave was behind us but has tightened again with the second wave of the pandemic. The reasons for the correlation are complex but generally have to do with the fact that both stocks and the Canadian dollar are considered risky assets. When the market favour risky assets, both the Loonie and stocks trade up, and when it fears risk, stocks trade down and investors prefer the safety of the US dollar. We are seeing that same pattern again this morning. With US retail sales coming in below expectations, the rally in stocks has paused and equities are trading down. Ditto for the Canadian dollar which is down 0.2%. One bright spot for the Canadian economy continues to be construction of single family homes. Starts were up 14% in October, offsetting the decline in multiple unit builds.
