Date: 07 Nov 2017

Canadian banks writing about the Canadian dollar, often referred to as the loonie, can often be interesting even though theirs is just another view.  Traders will always make up their own minds. So while traders might completely disagree with the conclusions drawn by Canada’s TD Securities in a note on USDCAD on Monday, they might at least want to know how the Canadian firm is thinking. Without implying others should follow suit, with a then spot entry reference of 1.2770, TD Securities “added a short USDCAD position to [their] model portfolio” targeting “a move to 1.2380” but with a “stop above the recent high at 1.2960, implying a slightly greater than 2/1 reward to risk ratio.”

Noting the loonie’s relative underperformance towards the end of Q3, a consequence in TD’s view of “a mix of data deceleration and a shift in tone from the [Bank of Canada], which has recently back peddled on its hawkish pivot from earlier in the year,”the Canadian firm now feels that much of the bad economic news is baked into the exchange rate and that “despite the recent deceleration in the data surprises, the market remains upbeat on the Canadian economy.” TD also feels that while the market is fully pricing in a Fed rate hike in December it may be somewhat underpricing the risk that the Bank of Canada hikes rates in January. TD also wonders if there is a possibility that “the recent bump in oil could reinvigorate some of the old links between” oil and the CAD. Whether there are enough CAD bulls out there who would agree remains to be seen.

Written by Neal Kimberley, External Currency Analyst.