Oh, Canada…should we trade your Canadian Dollar ETF?
Canada…our friendly neighbors to the north have their own currency called the Canadian Dollar. This is something that (like every current in the world) is pegged against the US Dollar.
Similar to most currencies in the world, the Canadian Dollar can be traded in the global markets.
Canadian Dollar Futures
The Canadian Dollar futures are a very popular futures contract as they trade with very negative correlation to the US Dollar. When the US Dollar goes up, the Canadia Dollar goes down. Pretty straight forward. And like all futures contracts, the Canadian Dollar trades in US dollars from Sunday at 6pm est (when Asia opens) to Friday at 5pm (when Globex closes for the week).
Like most futures contracts, the Canadian Dollar is challenging for most individual retail investors to trade because of its size. Too big is not good.
One futures contract in the /6C (Canadia Dollar) is $100,000 Canadian Dollars. That is big. Right now, /6C futures are trading at .7494 and each individual tick (.0001) is equivalent to $10 per tick. This makes the notional value of holding one Canadian Dollar futures contract $74,940. Fortunately for those gunslingers out there, the regulators only require an initial margin of $1,300 per contract meaning buying or selling one futures contract in the Canadian Dollar allows the investor to have almost 58 times leverage. That is a recipe for disaster.
How much can we expect to make or lose on this contract for one day? Right now, the expected one day move in the Canadian Dollar is .20%. This is tiny and makes it one of the products in the world right now with the absolute smallest expected move. This would mean that the daily expected move in the Canadian Dollar is 15 ticks (.0015) or $150. Not bad at all.
This makes the idea that the regulators allow anyone to have 58-1 leverage in the Canadian Dollar more realistic as right now an investor is expected to make or lose in our around $150 a day. That’s nothing especially since we are talking futures. This makes the Canadia Dollar futures contract not too big for any individual investor to trade.
But what if you do not have futures permissions and have to stick with just equities? Is there a Canadian Dollar ETF out there that is suitable for us to actually move forward with if we would like exposure to the Canadian Dollar?
$FXC…The Canadian Dollar ETF
We want to know if trading the Canadian Dollar ETF $FXC is a realistic and reliable way to have exposure to the Canadian Dollar without having to purchase futures contracts. We must look at two factors. Correlation and liquidity.
/6C and $FXC Correlation
Correlation is a measure of price movement. We take the price movements of two underlyings and compare them. If the price movements are similar, we will come out with a number above 75. This would make us believe that the two underlyings are highly correlation and thus are very likely to trade with one another. Again, this has nothing to do with sectors or industries but it has everything to do with price and price only.
Above is a chart of the Candian Dollar futures (green/red line) compared to the Canadia Dollar ETF $FXC (pink line). We can see that the two clearly trade in lockstep with one another. Behind the scenes, these two come out with a 99 correlation which means they pretty much trade tick for tick with one another.
It is not always this simple to find high correlation with futures contracts and their corresponding ETFs however. Crude oil and $USO trade with a 60 correlation as $USO is based on the price of the front two months of futures contracts. The Canadian Dollar ETF $FXC does not have this same issue as it is priced off of physical Canadian Dollars.
The Canadian Dollar ETF $FXC passes the correlation test better than 95% of the ETF futures out there. Again, it is not priced off the front two months futures contract and it is priced off physical Canadian Dollars.
Liquidity of $FXC (The Canadian Dollar ETF)
Correlation is very important. In this example, we would like to know if buying $FXC gives us the same exposure as we would have if we bought Canadian Dollar futures. This makes perfect sense to everyone. The Canadian Dollar ETF and /6C have a ridiculously high correlation so the above scenario is very realistic.
However, none of this matters unless there is sufficient liquidity. Because there was so much correlation, let’s hope that there is enough liquidity so that we can get busy with $FXC.
The bid and the ask during trading hours are only $0.02 wide. This is in the 90th percentile in terms of distance between what someone is willing to buy for and what someone is willing to sell for. Big brownie points here as the smaller the distance between the two the better.
The bid and the ask were great in the Canadian Dollar ETF now what about its volume. Do people really care? If they did, we would see volumes in the millions.
This is so weak. This little stock volume tells me that nobody cares. Institutions don’t care. Funds don’t care. Endowments don’t care. Money managers don’t care. But why can I say they don’t care? The notional value traded today was $3,959,634.06. No institutions get out of bed for that when they manage billions of dollars.
Maybe the options pit will tell us something good because the volume numbers completely turned me off here for the Canadian Dollar ETF $FXC. If there were a good amount of contracts traded today this could save the day!
Big swing and a miss here folks. 441 contracts is equivalent to $3,266,487 of notional value. That’s not even pennies for institutions. It’s a no go on options volume.
Again, we want institutions interested in what we are investing and trading in so that we can get in and out whenever we want at a fair price.
Can We Trade the Canadian Dollar ETF?
Negative. No liquidity. And while there is an incredibly high correlation, liquidity is the always the deal breaker. But we want to have exposure to the Canadian Dollar and the Canadian Dollar ETF is no good, what do we do?
$EWC is the Canadian version of $SPY so the way to think of it could be $EWC is the Canada ETF. $EWC and /6C have an 84 correlation as well as trade over 12 million shares a day and 15,000 options contracts. This is a match made it heaven.
So what do we do? Do we want exposure to the Canadian Dollar? Yes. But we cannot trade futures. Can we trade the Canadian Dollar ETF $FXC? No…it has no liquidity. Is there something else with high correlation to /6C and with enough liquidity to not get ripped off? Yes…$EWC has an 84 correlation and trades millions of shares per day. There you go, folks 🙂