BNY’s Geoff Yu points out that sales of Canadian dollar (CAD) bills declined ahead of the Bank of Canada (BoC) meeting, which allowed for compact purchases in CAD after sustained pressure. It notes the selling of USD/CAD by CAD-based investors and views valuations and positioning as supportive, but cautions that domestic sales and faint asset flows in Canada continue to drive value, advocating only selective exposure to CAD.

Flows are improving but growth is constrained

“Ahead of today’s BoC decision, our data shows that CAD-denominated bill sales have finally moderated, allowing small aggregate CAD purchases to emerge after a long period of pressure. BoC prices will continue to influence performance, but asset flows and holdings now appear to more fully reflect this policy, creating room for value to emerge. Higher energy prices may help on the margin, although CAD and Canadian equity flows rarely align closely with raw swings.”

“The key question is whether this could develop into a more sustained buying trend. The two-month moving average of CAD flows remains exceptionally low at near -1.5, a level typically associated with severe risk aversion. If the bad news is already reflected in price and onshore investors now see grounds to add hedges to overseas assets, the door is open to a more significant turnaround.”

“USD/CAD selling has resulted in significant improvement, suggesting CAD-based investors are no longer adding USD exposure following the extreme inflows in late June. We would add CAD exposure selectively rather than aggressively given that valuations and positioning are supportive, but domestic selling and weak underlying asset flows in Canada continue to limit upside.”

(This article was created with the aid of an artificial intelligence tool and has been reviewed by an editor. Find out more.)