Canadian Dollar: Tentative flow reversal before BoC – BNY

BNY’s Geoff Yu highlights that selling of Canadian Dollar (CAD) accounts has eased ahead of the Bank of Canada (BoC) meeting, allowing light CAD purchases after prolonged pressure. He notes USD/CAD selling by CAD-based investors and sees valuations and positioning as supportive, but warns that domestic selling and weak Canadian asset flows still cap upside, arguing for only selective CAD exposure.

Flows improve but upside constrained

"Ahead of today’s BoC decision, our data show that selling of CAD-denominated accounts has finally eased, allowing light aggregate CAD purchases to emerge after a long period of pressure. BoC pricing will continue to weigh on performance, but flows and asset holdings now appear to reflect that policy backdrop more fully, creating room for value to emerge. Higher energy prices may help at the margin, though CAD and Canadian equity flows rarely align closely with crude swings."

"The key question is whether this can develop into a more durable purchase trend. CAD’s two-month rolling flow average remains extremely weak at close to -1.5, a level usually associated with severe risk aversion. If the bad news is already reflected in the price and onshore investors now see grounds to add hedges on overseas assets, the path is open for a more meaningful reversal."

"USD/CAD selling has driven much of the improvement, suggesting CAD-based investors are no longer adding USD exposure after extreme inflows in late June. We would add CAD exposure selectively, not aggressively, given that valuations and positioning are supportive but domestic selling and weak underlying Canadian asset flows are still limiting upside."