If a country’s currency reflects the health and prospects of its economy, then the Canadian economy must be in poor shape. Not only did the currency lose 28% against the U.S. dollar over the past three years, but it lost 24% against a basket of currencies of its main trading partners.

Of course, commodity currencies, including the loonie and the Australian dollar, are all struggling courtesy of weak and declining prices of their key exports. In the case of Canada, the correlation between the currency and the spot price of crude oil is extremely high, indicating the market believes oil is a main driver of the country’s currency and economy.

To put this in perspective, consider the contributions of selected industries to the Canadian economy. Mining, quarrying, oil, gas and other commodities contribute about 10% of the country’s overall gross domestic product while manufacturing contributes 10% and services 70%. Despite the dampening effect of commodities and energy on the loonie, Canada is in essence a service-driven economy. Still, commodity exports make up 50% of the total export basket. So commodities are important for the trade account but less so in the overall economy.

The latest estimates indicate that the Canadian economy almost stagnated in 2015, with GDP growth of just over 1% for the full year. Not great, but considering plummeting commodities and drops in closely linked sectors such as construction, that growth does show that other sectors have fared much better.

A Two-Speed Economy

The latest numbers provided by Statistics Canada indicate that service industries such as finance, along with real estate rental and leasing, took up the slack. Though key manufacturing sectors managed considerable export growth during the year, the overall manufacturing sector still struggled and probably declined despite the sharply weaker currency.

But what will  2016 bring? According to the latest World Economic Outlook produced by the International Monetary Fund, the Canadian economy should grow 1.7% this year and 2.1% in 2017; the Bank of Canada expects similar growth. The advanced economies of the world should grow slightly faster than Canada in 2016, with the United States likely to grow 2.6% for the next two years.

Nevertheless, 2016 could again turn out to be a two-speed economic year for Canada, with commodities causing a drag on the economy, while non-commodity-related manufacturing, exports and tourism reap the benefits of the weaker currency.

According to the economics team at Toronto Dominion Bank, non-residential fixed investment will decline again in 2016 after the sharp fall in 2015. Sharply lower investments by commodity and energy producers will again be the main cause for this decline, while infrastructure-spending plans by the new Liberal government would provide some support for fixed investment in 2016 and 2017.

The bright light for the economy is the weaker loonie. Statistics Canada data indicate that several export categories of manufactured goods grew more than 10% over the year up to November 2015. This includes ships, locomotives, trucks, buses and furniture. The weaker currency is also causing Canadians to travel less abroad while the influx of foreign visitors is picking up rapidly.

A final piece of evidence comes from the Business Outlook Survey conducted by the Bank of Canada, which indicates that exporters not linked to commodities have favorable investment and hiring plans compared to domestically orientated companies and commodity exporters. This shows that economies take time to adjust to weaker currencies and to become more competitive in foreign markets so that they can win back business from competitors abroad.

Dodging the Commodity Meltdown

Commodities have long cycles and their prices, including oil prices, are likely to remain depressed for longer than most analysts expect. This also implies that the Canadian dollar is unlikely to regain its former glory anytime soon, although the downside is, in our opinion, limited from current levels.

Our Dividend Champions Portfolio holds several companies that stand to gain should the macro view pan out as I have described. Whistler Blackcomb (TSX: WB, OTC: WSBHF), InnVest REIT (TSX: INN-U, OTC: IVR.F) and WestJet Airlines (TSX: WJA, OTC: WJAVF) should benefit from the increase in tourism while Canadian National Railway (TSX: CNR, NYSE: CNI) should gain from additional manufactured goods exports (although it will lose some commodity freight volume). Apart from this, the portfolio has managed to avoid some of the deepest commodity holes. The portfolio side-stepped these holes by focusing on non-resource sectors and limiting investment in the resources sector to top-quality names only.