FX Convictions – Enter short USD/CAD

by: Georgette Boele

DISCLAIMER: This report has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead. This report is marketing communication and not investment research and is intended for professional and eligible clients only.

  • We are positive on the Canadian dollar versus US dollar
  • The Canadian economy has done well
  • Higher oil prices and weaker US dollar trend point to a lower USD/CAD
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Enter short USD/CAD

We add long Canadian dollar versus US dollar to our FX high conviction list (with stop loss at 1.38) for the following reasons. The Canadian economy has done well, because of strong private consumption (see graph below). We expect it to continue to do well and the contribution of net-exports to improve. Our oil analyst expects oil prices to rise to 60 USD per barrel at the end of this year. This should support the Canadian economy and the sentiment towards the Canadian dollar. The Canadian dollar has a strong positive relationship with oil prices so higher oil prices will probably push the Canadian dollar higher as well. Moreover, it is likely that the negative headlines about the Trump administration will remain. This will depress investor sentiment towards the US dollar and trigger more squaring of speculative net-long USD positions. Finally, the speculative positioning in the Canadian dollar is short at extreme levels (see graph below). A combination of higher oil prices and US dollar weakness will trigger the closing of some these excessive Canadian dollar short positions resulting in a recovery in the currency. Our year-end forecasts for USD/CAD for 2017 and 2018 are 1.32 and 1.24 respectively.