CAD: Set to underperform - Nomura

Analysts at Nomura suggest that NAFTA negotiations and the potential for further trade wars will naturally see Mexico and Canada come under pressure as the market’s natural trade proxies, but in addition to trade developments, more fundamentally they remain bearish on CAD.

Key Quotes

“In the short term, we still think CAD net-long positioning looks extended, and vulnerable to a pull-back. From a monetary policy perspective, we expect growth in Canada to slow relative to the US, which should suggest a slower pace of tightening by the BoC than the Fed. We expect these drivers to push USD/CAD towards 1.31 or higher.”

“We doubt this week’s BoC decision to generate much excitement for the market, but we expect the BoC to maintain a cautious stance – particularly in the light of increasing trade risks. There have been few new developments since the last meeting on the data front. Some disappointment in growth data (retail sales, unemployment) is largely offset by a strong January CPI print. With no monetary policy report released on Wednesday, we do not expect a big shift in the BoC’s stance, but our bias remains to trade CAD from the short side.”

“So all in all, this is why we are entering a tactical long GBP/CAD position at 1.7833, with a stop at 1.7565 and initial target of 1.83 where we will reassess as we expect the trend to continue.”