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Reluctance turning to belief for CAD bulls

What’s Next for the Canadian dollar
1) Why CAD is the best-performer this year
The Canadian dollar is the top performing currency in the world this year and it’s not hard to see why. We’re at the start of a new economic cycle, commodities are booming and the US has spent heavily on stimulus.
When we last spoke a month ago, I highlighted 83-cents as a target and here we are. That’s 1.20 in USD/CAD. IT’s a huge inflection level and a big psychological level.
2) Disbelief is the pre-requisite for a lasting move
If you look at targets from economists and banks, they’ve been slow to move. Most still show the Canadian dollar giving some back but you can see the shift in the market. The latest futures positioning data shows a big tilt towards CAD bets.
For the long-term, corporates need to get rattled. Corporate Canada loves holding US dollars – they’re some of the stronger hands out there but 83-cents is a pain point. Soon we’ll have headlines about fresh six-year highs, then we’ll see banks and economists shift targets and then the momentum takes over.
3) Market watchers underestimate how fast CAD can run
If you look at a long-term Canadian dollar chart, you see some sharps spikes lower. Those are global risk events – the financial crisis, the oil rout, the pandemic. That’s what you’d expect. What’s more surprising is how quick some of the moves higher are. They’re not event driven but were the result of steady improvements in growth, commodities and sudden BOC shifts. CAD rose to parity from 77-cents in a year from the depts of the financial crisis. That highlights some of those tipping points for corporates.
4) Oil will be the short-term driver
The next domino is oil. Iran is the big risk this week but I’m increasingly convinced that it’s priced in. Demand is coming back and the only way for oil to go is higher. I think that’s what really rattles central banks from their dovish perch.
5) BOC offers philosophical tailwind
For the Bank of Canada, we’re already there. There’s this global shift in central banks to wait for higher inflation but I don’t think the BOC is interesting in playing that game. They’ve been able to hit their target for much of the past decade and housing is a monumental risk. So we have Canada not only disconnecting on fundamentals but we have a central bank with a materially different philosophy.
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