The loonie is exactly where it should be relative to commodity prices, but if things go well for the domestic economy, this won't last.
The hoped-for transition from oil- and Alberta-led national growth to a focus on manufacturing exports from central Canada would see the domestic currency outperform the Citi Commodity Terms of Trade Index. The Citi index measures the price of commodities exported by Canada. The index is weighted by the average volume of commodity exports that actually occur so it is heavily influenced by energy prices.
The loonie's sensitivity to commodity prices over the past three years is clear from the chart below. The two lines tracked closely through 2012 and much of 2013 giving rise to the "petroloonie" theory. The reasons for the multi-month divergence that followed are a matter of debate, but it's clear at this point that the value of the currency is in the range suggested by commodity prices.
Bank of Canada Governor Poloz, in his Wednesday statement accompanying the bank's decision to maintain current interest rates, also noted, "data for 2014 as a whole suggest the anticipated rotation into stronger growth in non-energy exports and investment is well underway."
The governor's statement highlights the widespread belief that the weaker loonie will support growth in manufacturing exports. (For now, we'll leave aside the fact that the "rotation into non-energy exports" is more or less invisible in publicly-available data like the RBC Manufacturing PMI Index.)
Importantly, growth in non-commodity exports will not be captured by the Citi index, which covers only commodities. In fact, a sustained divergence between the lines on the chart could very well be a sign that the domestic economy's transition from resource dependence is ongoing.
Follow Scott Barlow on Twitter @SBarlow_ROB.