RISING CANADIAN DOLLAR HELPS PUSH CANADA ISHARES TO NEW RECORD -- THAT'S BECAUSE THE EWC IS QUOTED IN U.S DOLLARS -- THAT'S TRUE OF ALL FOREIGN STOCK ISHARES

CANADIAN DOLLAR HITS NEW 52-WEEK HIGH... A couple of my messages posted during Christmas week wrote about a more bullish outlook for commodity markets this year.  And the likelihood for a weaker U.S. dollar.  One of the messages wrote about the Canadian Dollar being the strongest developed market currency over the last year, and being highly correlated to the direction of commodity prices.  That's because Canada is one the world's biggest exporters of commodities.  That's especially true of energy which is one of Canada's biggest exports.   The "loonie" has turned even stronger over the past week.  That may carry good news for the energy sector which has led Canadian stocks higher over the last month.  But it also carries good news for Canada iShares (EWC).  We'll explain why shortly.

BULLISH BREAKOUT... The daily bars in Chart 1 show the Canadian Dollar rising above its July peak last week to reach the highest level in more than a year.   It's trading higher again today (see circle).   Some of today's gain is most likely tied to higher energy prices.   If that upside breakout holds, however, it would be another sign that investors are starting to put more funds into commodity markets which have been basing for the last year.  That's because the two markets are closely correlated.   That's especially true of energy and precious metals (with gold hitting a seven-year high today).  A higher Canadian currency is also good for Canadian stocks.   And Canada iShares in particular.

HIGHER CURRENCY HELPS PUSH EWC INTO RECORD TERRITORY...The red weekly bars in Chart 2 show Canada iShares (EWC) rising above its early 2018 highs last month to reach a new record (red circle).  That had a lot to do with the fact that its currency also achieved an upside breakout.  The green circle shows the Canadian Dollar rising above its July peak to the highest level in fifteen months.   Canadian stocks had already hit a new record earlier in the year and certainly contributed to last month's EWC breakout.  But so did the upturn in its local currency.  Here's why.

Chart 2

CANADA ISHARES ARE PRICED IN U.S. DOLLARS...Like all foreign stock MSCI iShares, the EWC is priced in U.S. dollars.  That makes it more responsive to the direction of the Canadian dollar relative to the U.S. currency.   It also means that the EWC does better than local stocks when the Canadian Dollar is stronger.  Which is the case at present.

EWC OUTPACES LOCAL CANADIAN STOCKS WHEN CURRENCY RISES...The red line in Chart 3 is a relative strength ratio of Canada iShares (EWC) divided by the Toronto Stock Index ($TSX) over the past two years.  The green line tracks the trend of the Canadian Dollar.  You can see that the two lines trend in the same direction.  Throughout 2018, a weaker Canadian currency caused the EWC to underperform its local stock index.

BOTH LINES ARE NOW RISING TOGETHER... Both lines bottomed together at the end of 2018 (see circles), traded sideways together for a few months; and trended higher together during the second half of 2019 (see rising trendlines).  And, not surprisingly, both lines achieved upside breakouts together over the past week.  That means that Canada iShares (EWC) are now rising faster than their local stock benchmark (even though both stock measures are in record territory).  Thanks to a stronger currency.  And that carries a broader message about investing in foreign markets.

MSCI ISHARES BENEFIT FROM RISING FOREIGN CURRENCIES AND STOCKS... My past few messages have suggested that 2020 is likely to see stronger commodity markets, a weaker dollar, and stronger foreign currencies.  Part of the reason for rising currencies is that foreign stocks have started rising again.   That normally gives a boost to their local currencies as well.  American investors looking to diversify into foreign stocks (developed and emerging) can use MSCI iShares as a way to benefit from both rising trends.   Since they're quoted in dollars, foreign stock iShares benefit even more when foreign stocks and their currencies are rising together.  Which could be an important trend in the new year.   Since commodity prices are also likely to rise, commodity exporters like Canada should do especially well.