CAD: Set to underperform – Nomura

Sam Bonney, Research Analyst at Nomura, suggests that from a strategy perspective, they maintain a bearish stance on CAD and expect the USD/CAD to rise in the coming months towards 1.31 or higher. But CAD downside is capped by higher oil price ranges, he further adds.

Key Quotes

“While the FX/rates correlation has broken down in much of the G10 space, it continues to hold relatively well for USD/CAD. We expect rates differentials to be a key driver of CAD weakness against the dollar, with slowing Canadian growth momentum versus the US to be a key catalyst.”

“Against the European currencies, we expect CAD to underperform. Underlying this expectation is our weaker dollar view, and positivity on European currencies as monetary policy catches up with the Fed/BoC. We continue to think CAD/NOK short positions are an attractive trade.”

“In terms of risks to our outlook, positive surprises in household consumption and credit growth would be the most likely triggers of a more hawkish BoC in our view.”

“Our key conclusions:

• Short-term drivers generally suggest a cautious stance on the currency for now. Net long positioning looks stretched and vulnerable to a pullback, while a fragile risk backdrop also warrants caution in our view.
• Over the medium term we expect the rates differential to exert upside pressure on USD/CAD. Slowing growth in Canada should see the BoC hike at a slower pace than the Fed – currently the market prices a similar pace of tightening. FDI outflows will also weigh on the CAD. However, we do think oil prices should hold higher ranges, and that should limit CAD downside.
• Long-term valuations send a neutral CAD signal. However, macroeconomic imbalances offer a glimmer of hope. Canada’s current account deficit should start to narrow gradually, exerting less downward pressure on CAD in the long term.”