Bank of America / Merrill Lynch on the Canadian dollar
The highlights from their report:
- Recent CAD selling by hedge funds and real money represents an important directional shift
- Hedge funds have moved decisively to reduce extended CAD longs; real money are lagging and have much further to go
- We continue to think that USDCAD will retest 1.33, driven by fundamentals and position liquidation potential
The report is quite a bit more detailed, but some of the further key points:
Risks remain sharply skewed to the upside in USDCAD over the next few months
Based largely on supportive US vs. Canada fundamentals and CAD position liquidation potential
- Hedge funds began buying CAD after BoC Senior Deputy Governor Carolyn Wilkins delivered an upbeat assessment of Canada's economic economy on June 12, marking the beginning of a pivotal shift in the BoC's policy stance that ultimately saw the two emergency rate cuts of 2015 reversed in the July and September meetings.
- Hedge funds were net buyers of CAD in 13 of the 15 weeks following that speech, amassing a large cumulative position that peaked the week of November 17. In the three weeks since, roughly 40% of hedge fund longs in CAD have been liquidated.
We think the risk is that real money follows the hedge fund lead and initiates the position squaring process. - real money sold CAD over the last two weeks, our calculations indicate that 95% of the position remains, nearly half of it established at levels below 1.25 and thus susceptible to liquidation pressure
Expects the Fed ... four additional hikes through 2018
- we do expect the BoC to follow the Fed ... timing is uncertain
- A data-dependent BoC is currently assessing ... economic impact of the two successive hikes delivered in Q3 ... trajectory of NAFTA negotiations
- Canadian CPI readings next week will feature prominently in the BoC's assessment ... as will the trend in household income and the level of the exchange rate.
More generally, we think that upside risks to the US dollar remain underpriced
